Volatility measures amplitude, not direction. An asset that moves up five percent in a day and an asset that moves down five percent are equally volatile. It is purely a measure of market anxiety.
The practical meaning of volatility is that it determines the size of everything else. A stop placed without taking volatility into account either triggers on normal market noise or ends up unjustifiably far away. That is why the stop distance is often tied to volatility rather than round numbers: the most common method is through the ATR indicator.
Volatility moves in cycles. Periods of compression, when the price moves within a narrow range, are followed by sharp spikes, and vice versa – after a strong move, the market usually calms down. Entire families of instruments are built on this property: Bollinger Bands narrow during calm periods and widen during a spike.
One more practical point: volatility changes depending on the time of day and the days of the week, and it jumps around important news. The same entry method that works calmly during regular hours starts hitting stops when the data is released. Hence the habit of experienced traders to look at the economic calendar not for forecasting, but for position sizing.
