Volatility is a statistical measure of how much price moves over a defined window. Usually expressed as an annualized standard deviation of returns — a stock with 30% annualized volatility has historically had a one-standard-deviation move of roughly 30% over a one-year period.
Two flavors matter to traders: historical volatility (realized — computed from past price data, rear-view mirror) and implied volatility (forward — derived from options pricing, what the market currently expects). When implied diverges from historical, options markets are pricing in a regime change.
Volatility is the input that connects position-sizing to risk. A 1% position size in a stock with 80% annualized vol carries about 8× the daily P&L variance of the same 1% in a stock with 10% vol. Sizing by dollars without accounting for volatility produces wildly inconsistent risk across the portfolio.
Vol clusters in regimes. High-vol days tend to be followed by high-vol days; quiet weeks tend to stay quiet until they don't. This is one of the most robust findings in market microstructure and is why ATR-based position sizing (which adapts to recent realized vol) outperforms fixed-dollar sizing in most journal samples.