In trading terms, volatility is the degree of variation of a financial instrument’s price over time. It reflects how “stable” or “unstable” the returns are. High volatility means large, frequent price swings (thus higher risk), while low volatility means relatively steady prices. In backtesting performance metrics, volatility is often quantified as the standard deviation of returns. For example, a strategy whose equity curve bounces up and down a lot has high volatility. Many risk-adjusted metrics (Sharpe, Sortino, etc.) use volatility in their calculation. By tracking volatility, traders assess the consistency of a strategy’s returns – a strategy with 30% annual return and low volatility is usually preferable to one with 30% return but wild swings.

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