What is Historical Volatility?
Updated: March 28, 2012 at 4:57 AM
Historical Volatility Definition. Historical Volatility is a method of calculating volatility of an underlying asset price, or relative value for a currency pair, over a measured period in the past. It can used to evaluate if implied volatility of a futures option is expensive by historical standards. There are basically two ways to consider volatility. The first way is to calculate the standard deviation in a series of rate changes that have already occurred in the past. In this case a Trader can choose the time period that interests him, whether 10, 20 or 30 days. This calculation yields the historical volatility. However, a Trader is more concerned about future expectations and will generally seek insights from the premiums charged in the options market. This approach is called the implied volatility. Implied volatility of options rarely correlates directly to the historical values due to market uncertainty about the future. As for currency markets, most studies have found that implied volatility is a good forecaster of future volatility, much better than historical volatility, particularly over a 30-day period, as well as a period of three months. Volatility is usually stated on an annual basis as a percent of change. To adjust for a shorter time period, the annual figure must be divided by the square root of the number of periods in one year.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.