Volatility Forecasting is a critical technique used in technical analysis, primarily associated with predictions regarding financial markets. ‘Volatility’ refers to the rate at which the price of an asset, such as a security or currency, increases or decreases for a set of returns. It measures the market’s expectation of the range of changes that will happen in the future price of a particular asset.
Volatility Forecasting, therefore, is the process of predicting this expected range of changes. Traders and investors often use it to estimate the fluctuations in the price of an asset. It is important because it helps market participants to manage risk and make informed decisions. Volatility is generally measured using statistical methods or by examining historical price data. However, it’s crucial to note that past volatility cannot predict future volatility with full accuracy, it only gives an estimate.
High volatility typically signifies that the asset’s price can change significantly in a short period, suggesting greater risk. Conversely, low volatility indicates that price changes are not as intense and implies lower risk. By forecasting volatility, market participants can evaluate the potential risk and return of different investment options effectively.
