Volatility And Trading by Jean-Olivier Fraisse
Volatility describes how fast and how much prices change. The larger a security's volatility, the wider its potential price move in a given amount of time. When measured consistently over time, a security's volatility generally remains within a well-defined range and periods of historically low or high volatility can be readily identified. These extremes do not last and the ensuing correction may provide a trading opportunity. Patience is essential because periods of extreme volatility can be protracted and further signals are required to confirm an impending price breakout. Overall, volatility is unreliable for market timing but it does provide a wealth of valuable information, in particular for options trading.
Low volatility characterizes a consolidation period of little price changes and sideways market moves. Such consolidation periods are an integral part of several well-known chart patternsócup with handle, flat base and so onóthat precede large price moves. Contrary to intuition, however, low volatility by itself has no predictive value for future price action.