The Crypto market never stands still. The prices of cryptocurrencies change constantly every day and every hour. However, sometimes the market experiences strong price fluctuations, a phenomenon known as “Crypto volatility” or Volatility. The following article Crypto Trading will provide investors with detailed information about this tool. Follow along!
What is Volatility in Crypto Trading?
One of the most common questions traders ask is what is the market? In English, Volatility, or market volatility. This is a term that refers to the change in the price of an asset over a certain period. This is the basis for measuring the level of risk in trading.
Volatility market movements can be strong or weak:
Highly volatile markets can provide high short-term profits. However, investing in these assets is considered riskier. Therefore there is a risk of large losses.
Conversely, an asset with low volatility is generally considered a low-risk investment. This is often the case with assets such as bonds, where volatility is very low because the redemption of the bond is considered safe.
The financial volatility of a set of assets directly affects the volatility of the portfolios containing these assets.
What creates volatility in crypto trading?
- News: Product prices will fluctuate strongly when there is related news that directly affects supply and demand. Assets that are frequently updated with news or are affected by supply and demand factors often have strong fluctuations.
- Liquidity: The more people are interested in and investing in an asset, the higher its volatility. For example, in 2017 when Blockchain technology started to attract attention. Many investors rushed to trade Bitcoin. This caused the price of this currency to increase by more than 1400% in less than a year.
- Natural disasters and epidemics: Natural disasters and epidemics can stagnate a country’s economy. From there, it affects the global supply chain. A typical example of this is the Covid-19 pandemic. It has caused the global economy to stagnate. At the same time, it has led to a decline in the entire financial market.
- Supply and demand factors: These are the immediate factors that cause the price of an asset to fluctuate greatly. For example, crude oil is often volatile due to supply information from the US and Saudi Arabia.
- Leverage: Assets that are allowed to be traded using leverage often have high volatility. When using leverage, investors often trade short-term. Because the longer the asset is held, the higher the margin cost. To compensate for the interest cost, these assets often have strong volatility fluctuations.
A specific example of Volatility for a newbie
To better understand the Crypto market, let’s look at a few specific examples:
Bitcoin (BTC) in 2017:
- Bullish Phase: Throughout 2017, the price of Bitcoin increased from around $1,000 in January. It reached nearly $20,000 in December. That is an increase of more than 1900% in just one year. This increase was mainly due to the huge media attention, institutional investment, and the growing acceptance of cryptocurrencies.
- Bearish Phase: After peaking in December, Bitcoin prices plummeted to around $6,000 in February 2018. That was a 70% drop in just two months. The decline was fueled by regulatory concerns, investor sell-offs, and panic.
Ethereum (ETH) and the DAO event in 2016:
- In June 2016, a decentralized autonomous organization (DAO) built on the Ethereum platform was hacked. This resulted in the loss of approximately $60 million in ETH. The event caused the price of ETH to fall from around $20 to below $10 in just a few days.
- The Ethereum community then decided to perform a hard fork to refund the lost funds. This led to the creation of two blockchains. Ethereum (ETH) and Ethereum Classic (ETC). This event also increased the volatility of ETH prices during that time.
See more: How to “get rich” thanks to crypto trading for trader
Classification of Volatility in Crypto Trading
There are three main types of volatility when it comes to the cryptocurrency market. Historical Volatility, Implied Volatility, and Realized Volatility. Each measures how much a cryptocurrency’s price has fluctuated over a given period. But they reflect volatility in different ways.
What is History Volatility?
Volatility – Historical volatility measures how much a cryptocurrency’s price has changed in the past. It is usually throughout 30, 60, or 90 days. It helps predict how volatile its price will be in the future. To calculate Historical Volatility, one uses the standard deviation of the logarithmic returns of the cryptocurrency over a given period.
Historical Volatility is a metric based on past data. It can be used to forecast the future price movements of a cryptocurrency.
Implied Volatility in Crypto Trading
Volatility – Implied volatility is a measure of how much the market believes the price of a cryptocurrency will change in the future. This is calculated based on the price of an options contract.
An options contract gives buyers the right (but not the obligation) to buy or sell a cryptocurrency at a specified price on or before a certain date. When the price of the option is higher, it indicates that the market expects the implied volatility to be higher as well.
What is Realised Volatility?
Volatility – Realized measures the actual of a cryptocurrency’s price over a given period. It is calculated by taking the standard deviation of the cryptocurrency’s logarithmic returns over that period. Realized is a useful tool for assessing the accuracy of historical Volatility. It also assesses the effectiveness of trading strategies based on this forecast.
Understanding the different types of cryptocurrency is important for investors and traders. To manage risk and make informed decisions about buying, selling, or holding cryptocurrencies. By tracking historical, implied, and realized, investors can better understand how the cryptocurrency market may perform in the future. They can then adjust their strategies accordingly.
The Role of Volatility Monitoring
Monitoring Volatility is important for investors and traders in the cryptocurrency market for the following reasons:
- Risk Management: Volatility provides important information about the volatility of cryptocurrency prices. Understanding volatility helps investors determine the risks associated with investing in a particular cryptocurrency. At the same time, adjust their risk management strategies accordingly.
- Making Trading Decisions: Monitoring Volatility helps traders make informed decisions about buying, selling, or holding assets. High volatility can create more trading opportunities. But it also comes with greater risks. While low volatility can be suitable for long-term investment strategies.
- Option Pricing: Volatility is an important factor in option pricing. High implied volatility usually increases the price of the option. It reflects expectations of large swings in cryptocurrency prices.
- Optimizing Trading Strategies: Understanding the different types of volatility (historical, implied, and realized) helps traders evaluate the performance of their trading strategies and optimize them. By tracking actual Volatility and comparing it with historical and implied Volatility forecasts. Traders can adjust their strategies to improve performance.
How to Calculate Volatility in Crypto Trading
We use the variance and standard deviation to calculate Volatility. This standard deviation is calculated by taking the square root of the variance.
Suppose the current monthly closing prices are between $1 and $10. For January through October, respectively. To calculate the variance, we perform the following steps:
Calculate the average value of the data to be calculated:
- Add all those values together and then divide by the total number of values.
- (1+2+3+4+5+6+7+8+9+10) divided by 10 = 5.5 USD
- So, $5.5 is the average value.
Calculate the deviation between the values and the mean:
- Determine the difference between each value and the mean: 10-5.5, 9-5.5, …, 1-5.5.
- This price difference can be any negative number. To calculate these values, investors can use Excel or Google Sheets.
Square the deviations: Square the deviations to eliminate negative values.
Calculate the sum of square values: Add all the square values together. In this example, the sum would be 82.5.
Calculate variance:
- Divide the sum of squared values by the total number of values (10).
- 82.5 / 10 = 8.25 USD
Calculate standard deviation:
- Take the square root of that variance.
- √8.25 ≈ 2.87 USD
The resulting standard deviation is $2.87. This number is considered a measure of risk. It shows how much the values vary from the average value. This gives investors an idea of how much the price may fluctuate from the average value.
Guide to reading and understanding the Volatilitys indicator
You probably have a basic understanding of Volatility. However, how to measure Volatility in the market may not be clear.
is usually calculated by the formula: vol = σ√T
In there:
- vol stands for Volatility
- σ is the standard deviation of the return
- T is the number of time intervals
Since measures the change in price over a given period. This formula takes the standard deviation and multiplies it by the square root of the measurement period. That standard deviation is then calculated by taking the square root of the variance. Variance is calculated by squaring the difference between the asset’s value and the average price over the period. Then divide it by the number of price data.
What are the metrics to know when analyzing Volatility?
If you find the above Volatilitysformula too complicated, don’t worry. Nowadays, online trading and charting platforms provide indicators to measure the Volatilitys of the market.
The most popular of these is the VIX index. It was created by the Chicago Board Options Exchange. VIX measures the implied volatility of the US Crypto market over 30 days. When the VIX index is above 30, it indicates that the market v is increasing. In addition to VIX, you can also use other indicators. For example, Bollinger Bands, ATR (Average True Range) indicator,… Many other tools to assess the markets.
How is Volatility measured?
In the cryptocurrency market, measuring is similar to that in the stock market. Although there are certain differences due to the characteristics of each asset class. Here are some common ways to measure Volatility in the cryptocurrency market:
- Standard Deviation: This method measures the Volatilitys of an asset’s price based on the standard deviation of price values over a given period. The higher the standard deviation, the greater the of the asset’s price.
- Sharpe Ratio: Used to measure the individual return that causes. The Sharpe Ratio can help assess the level of risk versus potential return.
- Index: Similar to the VIX index in the stock market. There are several indexes developed to measure the volatilitys of the cryptocurrency market. These indexes are usually calculated from the price volatility over a certain period. At the same time, they can provide information about the level of fear in the market.
- Beta: Although less common in cryptocurrencies than in stocks, Beta can still be used to measure the relationship between crypto assets and the overall market.
See more: Instructions for opening an MEXC global account
Trading Strategies with Volatilitys
Managing Volatility in the Cryptocurrency Market requires a disciplined approach. Here are some important strategies in Crypto trading:
- Dollar Cost Averaging (DCA). Instead of making a single purchase, DCA allows traders to spread out their purchases over time. This strategy helps reduce the impact of short-term volatility and the risk of making the wrong decision at the wrong time.
- Place a stop loss order: Setting a stop loss order helps limit losses in case the price falls. The trader sets a specific price that the market reaches. They will sell to minimize the risk of falling prices.
- Take profit when the price rises. Set a take profit order to automatically sell when the price reaches a pre-set profit target. This helps lock in profits and prevent potential losses when the price reverses.
- Position Size Management: Determine the appropriate trade size based on your risk tolerance and account balance. This helps avoid putting too much capital into a single trade and minimizes the risk of large losses.
- Diversify your portfolio: Allocate your investments across different cryptocurrencies, projects, and Derivatives. To minimize the risk and impact of price fluctuations.
- Emotional Control: Maintain discipline and avoid overreacting to short-term price fluctuations. This helps maintain a clear strategy and avoid impulsive decisions.
Tools to help predict Volatility with Crypto Trading
Technical analysis is one of the popular methods used by traders to predict and manage Volatilitys and Dump in the cryptocurrency market. Technical analysis tools help identify patterns, trends, and potential price movements. Here are some of the tools commonly used in the Volatilitys market :
- Moving Average (MA): Used to smooth price data and identify trends. Traders often combine short-term and long-term MAs. The purpose is to assess the strength of a trend and predict a possible reversal.
- Bollinger Bands: Consists of a moving average and two standard deviation lines around the price. Bollinger Bands help identify periods of high volatility and potential price breakouts.
- Relative Strength Index (RSI): Measures the speed and change of price movements. RSI helps identify overbought or oversold conditions. It also helps predict potential price reversals.
- Fibonacci Retracement Levels: Fibonacci levels are potential support or resistance areas based on the Fibonacci sequence. Traders use these levels to identify potential price reversal or continuation patterns.
- Volume Analysis: Provides information about market sentiment and the strength of price movements. High trading volume when prices are rising or falling can indicate the start or end of a trend.
Conclude
Above is the knowledge about Volatility market fluctuations that Crypto Trading has researched and shared. Hopefully, this information will help you make successful transactions in the cryptocurrency market. Follow the Blog to get more new news!
Frequently Asked Questions
How to Measure Volatilitys in Crypto Trading?
There are many ways to measure </span>. Examples include standard deviation, historical analysis of price movements, indices like VIX, and other tools based on price.
Why is Volatilitys </span>important?
Price volatility provides important information about the level of risk. At the same time, it brings the profit potential of a Crypto trading investment. It helps investors assess the Volatility </span>of the possibility of price changes in the future. From there, they can make reasonable Crypto trading investment decisions.
How can investors take advantage of price fluctuations in Crypto trading?
Investors can use price e=”vertical-align: inherit;”>volatility </span>to set up Crypto trading strategies. For example, short-term trading is based on short-term fluctuations. Or long-term investing based on predicting long-term market trends.
