The misunderstandings and misconceptions between volatility and momentum can lead to expensive trading mistakes and can even result in totally flawed chart and market analysis and trading decisions.
Volatility and momentum are two fundamentally different things and we will explore the differences between the two concepts, how to measure volatility and momentum and how to use them for effective trading decisions.
What is volatility?
Volatility describes how much price fluctuates around a mean. If you would use a moving average and see price going back and forth around the moving average, markets are in a high volatility environment. Furthermore, if candlesticks have relatively long candle shadows, compared to the candle body, it also signals a volatile market.
Thus, volatility is also often referred to as a risk indicator because high price fluctuations can signal indecision in the markets and the powers between buyers and sellers are constantly shifting.
What is momentum?
To a certain degree, momentum