A volatility cycle is the natural rise and fall of price movement intensity in financial markets. Prices never move at a constant pace. Markets shift between calm periods where price changes are small and predictable, and active phases where moves become sharp and irregular. This pattern repeats over time and creates the cycle that traders refer to when analysing volatility. It matters because it shapes trading opportunities, risk levels and the behaviour of participants.

A cycle often forms as market conditions evolve. During long stretches of stability, traders grow comfortable, liquidity increases and volatility slowly contracts. This usually leads to tight ranges and consolidation. However, low volatility rarely lasts. As economic data, policy decisions or shifts in sentiment build pressure, the market becomes primed for a breakout. Once a catalyst appears, volatility expands quickly. Prices move with more force because positions unwind, new traders enter, and momentum becomes a driver. This phase can create large swings and stronger directional moves.

Eventually, the market absorbs the shock, and volatility begins to cool again. Participants adjust to the new conditions, liquidity returns and ranges narrow. The cycle returns to a quieter phase until pressure builds once more. Understanding this rhythm helps traders match strategy to conditions, manage risk more carefully and avoid being caught off guard when markets shift from calm to active or the other way around.