Definition in one sentence: volatility is the standard deviation of an asset's or strategy's returns over a given period — a measure of the amplitude of variations, upside and downside alike.
What it measures
Volatility quantifies how much returns deviate from their average. The wider the daily variations, the higher the volatility. It is generally annualised to compare assets or strategies with one another.
Crucial point: volatility treats a rise and a drop of the same amplitude identically. A day at +5% and a day at −5% contribute exactly the same. It is a measure of noise, not of pain.
How to read it
Crypto is, by nature, a very volatile asset class — annualised volatilities of 50 to 80% are not exceptional, where a major equity index often runs around 15 to 20%. High volatility is therefore not abnormal; what matters is whether it is rewarded by return. That is exactly the question the Sharpe ratio asks.
The classic mistake
Believing that low volatility means low risk exposure. It is false, and even dangerous: an asset can drift slowly downward, with modest daily variations (hence low volatility), while accumulating a considerable maximum drawdown. Low volatility and a large drawdown settling in silently: that is the most treacherous scenario. Volatility captures neither the depth nor the sequence of losses.
At Sextant
Sextant is a transparent quant platform: volatility is used as a tool, never as a verdict. It feeds position sizing and the reading of the market regime by a transparent rule based on trend and volatility — but it is always the return / maximum drawdown pair that judges a system. The dashboard and the methodology show these readings side by side.
Frequently asked questions
How is volatility calculated?
It is the standard deviation of an asset's or strategy's returns over a given period, generally annualised to allow comparison. The more returns deviate from their average, the higher the volatility.
Does low volatility mean low risk?
No. An asset can drift slowly downward with modest daily variations — hence low volatility — while accumulating a large maximum drawdown. Volatility captures neither the depth nor the sequence of losses, unlike the drawdown.
What volatility is normal in crypto?
Crypto is a very volatile asset class: annualised volatilities of 50 to 80% are common, versus 15 to 20% for a major equity index. High volatility is therefore not abnormal; the real question is whether it is rewarded by return.