The Role of Volatility in Risk Management

Volatility measures how much and how quickly price fluctuates over a given period. Adjusting risk management to current volatility, rather than using fixed numbers regardless of conditions, tends to produce more consistent outcomes.

Why Fixed Distances Fall Short

A stop loss set at a fixed pip distance might be too tight during a highly volatile period, getting hit by normal price swings, or unnecessarily wide during a calm period, risking more than needed. Measuring recent volatility (using tools like average true range, commonly abbreviated ATR) helps calibrate stop and target distances to current conditions instead.