Historical Volatility is a momentum indicator that analyzes the price deviation of Bitcoin (BTC), Ethereum (ETH), and altcoins. The Historical Volatility indicator is useful for predicting markets with high volatility. HV is similar to the VIX index in the stock markets that predicts volatility spikes.
The HV indicator is based on the average price of Bitcoin and the percentage it deviated over that price. The indicator starts at a baseline of 0 and goes up to 200 on the chart. A low rating on the HV indicator indicates that we’re in a stable market and a high rating means that we’re in a volatile market.
The indicator is used to differentiate volatile and stable markets. If we’re in a volatile market, crypto can go up and down fast. This presents opportunities for traders to make money by placing trades in volatile markets. Traders can use the indicator as a safety mechanism to place better stop-losses and secure their capital.
Summary:
- Volatility is a deviation from the average price of an asset. If the value fluctuates up or down significantly, it’s volatile.
- Volatile markets present the best opportunities for traders to make money because the price can go up significantly and they can place trades accordingly.
- The Historical Volatility (HV) measures the historic volatility of Bitcoin and altcoins and signals when the market is volatile.
- The indicator has a base rating of 0 and can go up to 200 in some cases. It can be used on all crypto charts to analyze historical volatility.
- The Historical Volatility formula is based on the moving average (MA) and the standard deviation from that price. Using historical volatility data we can derive the rating for the indicator.
- When the price of Bitcoin is going up significantly and we see price changes in one direction, the volatility rating bottoms out because the trend is predictable. When Bitcoin’s price sees rapid movement in either direction, the rating tops out because the trend is unpredictable.
- While the indicator can inform traders they’re in a volatile market, it doesn’t provide data as to whether to long or short Bitcoin. The trader has to decide if the price will go up or down on their own.
- The indicator cannot predict trends in the crypto market and traders have to combine it with other indicators to get optimal results.
What Is Volatility?
Volatility represents the deviation of the price from the average price over a certain period of time. The rate of change is measured in percentages and used to calculate volatility on different indicators. If Bitcoin’s price is moving in one direction (trending), it has low volatility. If Bitcoin is going up or down fast, it has high volatility.
Crypto markets are volatile by nature and traders can take advantage of that. In the short-term, traders could place profitable trades by capitalizing on 5-10% daily moves. In the long-term, the price of crypto could appreciate by hundreds of percentage points.
Bitcoin Historical Volatility
Bitcoin is the most volatile asset in world history. The most volatile years were the initial few years it started trading, from 2010 when the price was $0.10 per BTC until 2013 when the price reached $1,200 – providing a 130,000% (13,000x) return for investors within less than 3 years.
Bitcoin was more volatile back then because the market cap was lower – making it easier to move. The market cap of Bitcoin is currently over $1 trillion, making it comparable to blue chip stocks such as Google, and the volatility decreased because it requires more capital to move.
Volatility doesn’t just mean that Bitcoin appreciates. The same way early investors profited from volatility to the upside, they lost money if they bought at the wrong time or didn’t hodl for the long term. The price has historically dropped 30-40% within a monthly candle multiple times:
Bitcoin’s biggest losses on monthly candles this decade. (Log Chart)
Bitcoin experienced multiple bear markets since its inception, and these were reflected with long depreciation periods such as the bear market of 2014 and 2018. The most recent example was the May 2021 crypto crash when Bitcoin dropped nearly 40% in a month.
What Is The Historical Volatility Formula?
The Historical Volatility indicator formula is based on a moving average over a set period. Traders can manually adjust this moving average in the indicator. By default, it uses 10 periods which reflect as a 10 day moving average on the daily chart, or a 10 week moving average on the weekly chart. Here’s how to calculate Historical Volatility:
Historical Volatility data is the historical price derived from a moving average, and that price is then computed with the expected mean price based on historic prices over a set period. This is automatically calculated for traders on our platform.
How to Use The Historical Volatility Indicator?
The Historical Volatility (HV) indicator is available for all Phemex trade pairs on the spot markets and futures markets. To get started, select a pair such as BTC/USDT and load the chart:
The “Indicator” bar allows you to search from hundreds of indicators.
Press on “Indicators” at the top and search for “Historical Volatility”:
Search for Historical Volatility and the engine will locate it.
Left-click on the indicator and it will load underneath the Bitcoin chart:
The indicator is activated on the Bitcoin chart with the default settings.
The default period set for the indicator is 10. This means that on the daily chart, it would calculate a historic volatility average based on a 10-day moving average. If we want to calculate based on 20 days, we could press on “Settings” near the “HV 10” rating on the bottom left and change the length to 20:
Adjust the period length according to your trading style.
This would calculate the historical average for the last 20 days. At the time of writing, the historical volatility of Bitcoin is dropping according to the indicator:
The predictable price action signals lower volatility.
Historical Volatility is excellent for minimizing risk over a given time. A trader that wants to play it safe could trade in markets with low volatility by waiting for the HV indicator to drop. They could deploy safety mechanisms such as stop-losses to prevent capital losses in a volatile market.
The value on the indicator will not change much on a short-term basis. The indicator takes long-term data derived from weeks and months of price changes to determine the average price and the deviations in that price. It’s best used for long-term investing.
How to Trade With the HV Indicator?
The Historical Volatility indicator should be combined with signal indicators because it doesn’t calculate the trend direction – it can tell us the volatility of the price action. Indicators such as the Stochastic RSI (StochRSI) can tell if Bitcoin is overbought or oversold, indicating a potential future direction:
The HV and StochRSI indicators combined for trading.
If the “K” line (blue) goes above the “D” line (red), it’s a buy signal and a trader can open a long trade. If the D line goes above the K line, it’s a sell signal and a trader can open a short trade. The trades should be placed when volatility on the HV indicator is low or below the median.
In the example above, we can see how the StochRSI indicator provided accurate buy and sell signals that materialized in future prices. However, the HV indicator warned us about a volatile area where prices depreciated and appreciated fast.
Implied Volatility vs Historical Volatility
The difference between implied volatility vs historical volatility is that implied volatility can predict how volatile Bitcoin could become in the future, while historical volatility derives data from history and uses that as the basis to calculate the current volatility of Bitcoin.
These are both crucial tools for traders who need data about volatility. There are also volatility indicators such as the Relative Volatility Index (RVI) which is a spinoff of the Relative Strength Index (RSI) for volatility. RVI can predict the direction of the volatility and tell us if it’s going to go up and down. We can combine them both on Phemex:
Historical Volatility combined with a trend indicator.
In this instance, the RVI indicator predicts volatility will be to the upside and the Bitcoin price action reflects that by posting consecutive green candles on the daily chart. The two indicators can be used in conjunction to confirm trending markets and trend directions.
Conclusion
The Historical Volatility (HV) indicator is a tool that calculates how high the volatility is on the market. It’s limited because it doesn’t take into account future trend directions. If the HV rating is low, it’s very safe to invest in the market. If the HV rating is high, a trader is facing more risk.
The deviation from the average price of crypto can give us accurate volatility readouts. It oscillates based on a rating corresponding to the deviation from the moving average (MA) to indicate if crypto is volatile or stable.
For traders to accurately predict future trends, they have to combine the HV indicator with trend indicators such as the RVI or RSI indicators. These can point to the direction the price is going and help place long or short trades on Bitcoin accordingly.
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