Historical Volatility: annualised standard deviation of returns

What it measures

Historical volatility is the standard deviation of logarithmic returns over a window, scaled to an annual figure.

It answers how much the instrument has been moving in percentage terms, which makes it directly comparable between a coin trading at three dollars and one trading at sixty thousand.

It is the same quantity that options pricing uses, which is why it is quoted as an annual percentage even on a five-minute chart.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Compute the log return of each bar: the natural log of the close divided by the previous close.

2. 2

   Take the standard deviation of those returns over the window.

3. 3

   Multiply by the square root of the number of periods in a year for that timeframe.

4. 4

   Express the result as a percentage.

Settings

A window of ten to thirty bars is typical. Shorter windows react quickly and produce a very noisy estimate; the standard deviation of ten samples is not a precise number.

How to read it

• A reading of eighty percent means the instrument has been moving at a pace that, sustained for a year, would produce that much dispersion.
• Comparing the current reading against its own history tells you whether this is a quiet or violent period for this instrument.
• Rising volatility during a decline is normal; rising volatility during an advance is unusual and often marks a blow-off.
• It is directionless by construction and says nothing about which way price will go.
• The most common use is regime detection for position sizing: halve the size when the reading doubles, and the risk taken per trade stays roughly constant across quiet and violent periods. That single adjustment does more for a strategy result than most entry improvements.

Where it misleads

Related indicators