Traders and investors everywhere are spooked by volatility whenever it rears its head. We hear about it every time stocks take a tumble, even if that doesn't happen so much these days. So the Investopedia definition I'll show you is probably the last thing they're thinking of.
"Volatility: A statistical measure of the dispersion of returns for a given security or market index. Commonly, [emphasis mine] the higher the volatility, the riskier the security."
Now, that doesn't sound so scary, does it?
Volatility is nothing more than a statistical tool that shows how much a stock goes up or down. Yet many see volatility as a bad thing, because they equate it to risk. And risk is bad for us, right?
Well, sometimes risk is bad. But to the smart investor, volatility is a difference maker. Because without it, you might as well just buy a CD. More importantly, you have zero chance of beating the market. And where's the fun in that?
That's right: Without volatility, you don't beat the market.
That's why one of my 10 Trading Commandments is "Volatility is a trader's best friend!"
About the Author
Chris Johnson is a quant - he's obsessed with building and perfecting mathematical models that allow him to predict, with startling accuracy, the direction of the markets, entire sectors, and individual securities. For the last year, he's been researching and building a new system that lets him move swiftly in and out of the hottest stocks in the market for life-changing gains - entirely on his own terms. The results of his newly-minted Night Trader system are nothing short of amazing.
Chris also contributes to Money Morning as the Quant Analysis Specialist.