Volatility

Annualized standard deviation of returns -- calculation, interpretation, and comparison across assets.

What is Volatility?

Volatility measures how much your strategy's returns bounce around from candle to candle. Think of it as a "bumpiness" score for the ride -- a smooth, steady equity curve has low volatility, while a jagged one with big swings has high volatility.

Two strategies can have the same total return, but very different volatilities. One might climb steadily with small daily moves while the other swings wildly up and down before arriving at the same destination. Volatility captures that difference.

Both strategies earn the same total return. Volatility measures how bumpy the journey was, not where it ended up.

How It's Calculated

Volatility is the standard deviation of your strategy's candle-to-candle returns, scaled up to a yearly figure. Standard deviation is a measure of spread -- it tells you how far the typical return is from the average return.

Annualized Volatility

annualized volatility = standard deviation of candle returns * sqrt(candles per year)

In plain English: first, calculate how much each candle's return differs from the average. The standard deviation summarizes those differences into a single number. Then multiply by the square root of the number of candles in a year to convert from a per-candle figure to a per-year figure.

The "candles per year" factor depends on your instrument and timeframe. For a stock on a daily chart, it is 252 (the number of US trading days per year). For crypto on a daily chart, it is 365 (crypto markets trade every day). For intraday timeframes, the number is much larger because there are more candles per year.

Volatility is annualized

Because Simula converts volatility to a yearly rate, the number is comparable across different timeframes and backtest lengths. A volatility of 0.25 on a 1-hour chart means the same annual bumpiness as a volatility of 0.25 on a daily chart -- the annualization step handles the conversion.

Worked Examples

Low volatility -- steady returns

A stock strategy on a daily chart produces 4 candle returns: +1%, -1%, +1%, -1%.

The average return is 0%. Now measure how far each return is from that average: the four differences are +1%, -1%, +1%, -1%. Square each one: 1, 1, 1, 1. The average of those squares (using N-1 = 3 for sample standard deviation) is 4/3 = 1.333. Take the square root: 1.155% per candle.

Annualized volatility = 1.155% * sqrt(252) = 1.155% * 15.87 = 18.33%, or about 0.183 as a decimal.

High volatility -- big swings

Another stock strategy on a daily chart produces 4 candle returns: +5%, -5%, +5%, -5%.

Same pattern, but the swings are 5x larger. Using the same process: differences from the average (0%) are +5%, -5%, +5%, -5%. Squared: 25, 25, 25, 25. Average (N-1): 100/3 = 33.33. Square root: 5.774% per candle.

Annualized volatility = 5.774% * sqrt(252) = 5.774% * 15.87 = 91.65%, or about 0.917 as a decimal.

Reading Your Results

These ranges are rough orientation, not hard thresholds -- annualized volatility depends heavily on the asset and timeframe. A reading of 0.40 is low for a crypto strategy and high for a bond one, so compare against similar assets rather than a universal scale.

Low volatility (below 0.15)

The strategy's returns are relatively steady from candle to candle. The equity curve is smooth with small fluctuations.

Moderate volatility (0.15 to 0.40)

The strategy has noticeable ups and downs but nothing extreme. This range is common for many backtested strategies.

High volatility (above 0.40)

The strategy's returns swing significantly from candle to candle. The equity curve is bumpy with large moves in both directions.

Things to Watch Out For

Exposure affects volatility

Volatility is calculated across every candle in the backtest, including candles where your strategy has no position and returns 0%. If your strategy's exposure is low, many candles will have zero returns, which pulls the standard deviation down. A strategy with 20% exposure will show lower volatility than the same strategy at 80% exposure, even if the actual trades are equally bumpy.

Volatility counts all movement, not just losses

Volatility treats upward swings and downward swings the same. A strategy that regularly jumps 5% in a day will have high volatility even if it never loses money. If you care specifically about downside movement, the Sortino Ratio isolates only the negative returns.

Leverage amplifies volatility

If your strategy uses leverage, every candle's return is multiplied by the leverage factor. This directly increases the standard deviation and therefore the reported volatility. Simula shows volatility for each leverage level separately.

The annualization step is an approximation

Multiplying by the square root of candles-per-year assumes that each candle's return is independent of the previous candle's return. In real markets, returns can cluster (periods of calm followed by periods of turbulence). The annualized figure is a useful standardization, but it is a simplification.

Sharpe Ratio -- measures return per unit of volatility. Uses annualized volatility as its denominator.

Sortino Ratio -- similar to the Sharpe Ratio, but only considers downside volatility (negative returns) instead of total volatility.

Max Drawdown -- measures the worst single peak-to-trough decline. Volatility captures the overall bumpiness, while max drawdown captures the single worst dip.

Exposure -- the percentage of candles with an open position. Low exposure adds many zero-return candles, which reduces reported volatility.