Historical Volatility (HV)
Last updated
Last updated
Historical Volatility (HV) is a statistical indicator that measures the degree of variation in an asset's price over a specific period of time in the past. It reflects how much the price has fluctuated and serves as a key tool for assessing market risk. HV is typically expressed as an annualized percentage and calculated based on historical prices — most commonly using daily closing prices.
Unlike implied volatility, which looks forward and is derived from option prices, historical volatility looks backward. It helps traders understand how volatile a market has been and set realistic expectations for future price swings based on past behavior.
Historical Volatility is calculated by determining the standard deviation of logarithmic returns of an asset's price over a selected time frame (e.g., 10, 20, or 30 days). The formula for daily HV is as follows:
HV = StdDev(ln(P₁/P₀)) × √N
Where:
P₁ and P₀ are successive closing prices
ln represents the natural logarithm
StdDev is the standard deviation
N is the number of periods (e.g., 252 for annualizing daily returns)
The result gives you the asset's historical volatility, which shows how dramatically the price has moved in the recent past.
Reading Historical Volatility is straightforward:
High HV indicates large historical price swings. This often corresponds to riskier or more speculative markets.
Low HV implies relatively stable price action, typical of less volatile, more "stable" instruments.
While HV alone doesn’t predict the future, it provides vital context for comparing different assets or evaluating current market conditions relative to the past.
The optimal settings for HV depend on your trading style:
Short-term traders may use a 10-day or 14-day HV to capture recent bursts of volatility.
Swing traders might use 20 to 30-day HV for a more balanced picture.
Long-term investors may prefer 60 or even 90-day HV to smooth out short-term noise.
In most charting platforms, 20-day HV is a commonly used default and works well as a general reference.
Here are a few ways traders can incorporate Historical Volatility into their strategies:
High HV environments may require wider stop-losses or smaller position sizes to account for greater uncertainty. Low HV environments may allow tighter risk controls.
An uptick in HV following a period of low volatility can signal a potential breakout. Traders can combine HV with technical patterns to catch major price moves early.
Use HV to compare the relative risk of multiple assets. For example, between two potential trades, the one with higher HV might offer more potential reward — but with higher risk.
In options markets, traders may compare HV with Implied Volatility (IV). If IV is higher than HV, the market may be overpricing risk — a possible opportunity for selling options.
HV is a historical measure and does not predict future volatility. Never use it in isolation without confirmation from other indicators or market context.
High volatility does not always mean bearish or bullish. It simply indicates larger price moves — which can be either direction. Always combine with trend or momentum indicators.
Using too short a period can create noise, while too long a period may make HV less responsive. Adjust settings based on your trading horizon.
Historical Volatility is a simple yet powerful indicator that allows traders to measure past market behavior and prepare for potential future movement. While it doesn’t predict direction, it tells you how "fast" or "wild" the market has been, which can be invaluable when determining trade size, setting risk, or identifying breakout opportunities.
When used wisely — and in conjunction with other tools — Historical Volatility becomes an essential part of a trader’s decision-making arsenal.
