Volatility expansion describes a market condition characterized by a significant and rapid increase in the price fluctuations of an asset or market over a compressed period. In crypto markets, this often precedes or accompanies substantial price movements, presenting both heightened risk and considerable opportunity.
Mechanism
This phenomenon typically occurs when a market experiences elevated uncertainty, a surge in trading activity, or reacts to unforeseen news events, leading to larger and more frequent price swings. Technical indicators such as Bollinger Bands or Average True Range (ATR) commonly signal such an expansion.
Methodology
Trading strategies frequently adapt to volatility expansion by adjusting position sizes, modifying stop-loss orders, or deploying options strategies designed to capitalize on increased price movement, such as straddles or strangles. Risk management systems must account for this by dynamically recalculating margin requirements and potential loss scenarios.
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