Volatility is just a measure of how much a market moves, regardless of direction. Realized volatility (also called historical volatility) is the version you can compute directly from price: the standard deviation of the market's recent returns. It underpins position sizing, stop distance and the expected daily move.
It is worth understanding properly, because volatility, unlike direction, is genuinely persistent. Quiet periods tend to stay quiet and violent periods tend to stay violent, so a measurement of recent volatility carries real information about the near future.
How to calculate it
Take a series of closing prices and convert them to returns. Most practitioners use log returns, the natural log of each close divided by the previous close, because they add up cleanly over time and are symmetric. Then take the standard deviation of those returns over your window, say the last 20 or 30 days.
That standard deviation is the daily realized volatility. A value of 0.01 means a typical day is about a 1 percent move. It is a single number that captures the size of the market's recent wobble.
Daily versus annualized
Volatility is often quoted annualized so different markets can be compared. To annualize daily volatility you multiply by the square root of the number of trading periods in a year, roughly the square root of 252 for daily stock data (about 15.9), or the square root of 365 for a market that trades every day like crypto.
The square-root scaling matters: volatility grows with the square root of time, not linearly. That is also why a two-day expected move is not twice a one-day move but about 1.4 times it.
Realized versus implied volatility
Realized volatility is backward looking: it is what actually happened. Implied volatility is forward looking: it is the volatility that options prices imply the market expects, extracted from what traders are paying for options.
The gap between them is itself a signal. When implied sits well above realized, the market is paying up for protection or expecting turbulence; when implied falls below realized, options may be underpricing risk. Realized is the honest baseline you measure everything else against.
What traders do with it
- Position sizing: hold risk roughly constant by taking smaller size when volatility is high and larger when it is low.
- Stops: set stop distance in proportion to realized volatility so ordinary noise does not knock you out.
- Expected move: project a one and two standard deviation range around price to see how far a normal day can travel.
- Regime detection: a sharp rise in realized volatility often marks a change of character worth respecting.
The honest caveat
Standard deviation assumes a roughly bell-shaped distribution, but real returns have fatter tails: extreme days happen more often than the model says. So treat volatility bands as a useful guide, not a hard boundary, and lean on measured hit rates rather than the textbook 68 and 95 percent figures. The Secuora Index applies exactly this, sizing its expected-move bands from realized volatility and then showing how often the band actually contained the close over history.
Frequently asked questions
How do you calculate realized volatility?
Convert closing prices to log returns (the natural log of each close over the previous one), then take the standard deviation of those returns over a window such as 20 or 30 days. Multiply by the square root of the periods per year to annualize.
What is the difference between realized and implied volatility?
Realized (historical) volatility is measured from prices that already happened. Implied volatility is derived from options prices and reflects the volatility the market expects going forward. Comparing the two shows whether options look expensive or cheap.
Why use log returns for volatility?
Log returns add up cleanly across periods and are symmetric between gains and losses, which makes them the cleaner input for standard deviation and for scaling volatility across different time horizons.