What is the rule of 16 volatility?

Understanding annual volatility is crucial for investors and traders alike, as it provides insights into the potential range of price movements over an extended period. It serves as a risk metric, informing decision-making processes related to portfolio allocation, risk management, and trading strategies.

Additionally, the estimation of volatility is not limited to crude markets but is applicable across various asset classes, including equities, commodities, currencies, and, notably, cryptocurrencies. As such, it is a fundamental tool in the financial markets, used by both retail and institutional investors.

Crude volatility estimation involves assessing the potential daily movement of a market, whether upwards or downwards, at a rate of 1%. This figure serves as a benchmark for understanding the short-term fluctuations within a given asset or instrument.

To convert this daily volatility into an annualized measure, a commonly used method is the "rule of 16." This rule involves multiplying the daily volatility by 16 to obtain the annual volatility figure. In this case, 1% daily volatility translates to 16% annual volatility.

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