We have seen historic volatility in markets for the duration of the credit crunch, and post-credit crunch we will certainly see a lot more. Volatility is a key indicator of how recovery is panning out.

Volatility is interesting - it can be viewed from many different perspectives. From a mathematical point of view, you could view it as an outcome of how many driving factors hold sway. Traditionally, you can see it as a function of risk. You can see it as an outcome of uncertainty and information flow. It can be looked at as just another random number to chase in the game of trading. Volatility is all of the above, and more.

Heaven forbid you look at it across different time windows, because what can look like a calm unvolatile market over a few days, can look like a hugely volatile spike of the price action over a period of weeks. Actually doing this opens up an interesting point of view that can help in understanding market sentiment.

I see volatility as a function of randomness or, if you like, a signal-to-noise ratio. Although the industry rails against it, markets are highly random. Anyone who has crunched the data of liquid stocks will tell you as much. In markets, statistical randomness is overwhelming.
Randomness equals noise.

If we care to agree that the long-term return on a stock is roughly seven per cent a year, we can see that the signal in underlying trading is equivalent to 7/365 or, for the sake of keeping it to trading days, 7/255 (0.027%) - ie, bugger all. Yet a stock like Vodafone will have a daily trading range of, on average, 3.5%. Even the blended FTSE 100 has a daily trading range of 2.79% versus the 0.027% trend.

It seems harsh to condemn 99.99% of a day's trading to randomness but when we select a moving average on a chart we are doing just that - a moving average simply smudges out randomness in a chart revealing the trend. If you want to get clever you can use wavelets, signal-processing mathematics, themselves a moving average, and split the trend and noise out. If you do, you're back to volatility being the amplitude of randomness in the price action of the market.

What does this hypothesis tell us about the markets in recent months and what does it tell us about the markets now and going forwards? If volatility is noise, it suggests that the less volatility there is, the less randomness there is in the market. This further suggests that the market move underway is based on information.
By looking at volatility over different time horizons you can see the randomness of the event in question. For example: if a company releases good news during market hours the price will spike up. The short-term move will be very unrandom over that time window and very unvolatile. Pull back over three months and take into account other news - good and bad - and the picture looks very volatile, the collection of events ending up creating a random picture.

Information does not move the market instantaneously. Markets have inertia and information flows over time. The less volatile a series of market moves, the more certain the market is of the ongoing trend.

After last autumn's crash, the market went through a sustained period of high volatility, suggesting the market had no idea of what was going to happen next. What happened was, in the New Year, a final violently bearish leg-down, with very low short-term volatility, strongly suggesting the market was once again in catastrophic trouble.

Happily, government intervention finally turned the tide. As I write, we have enjoyed two bullish repricing events - both of which had sharp rises without much intra-day volatility. This underlines that, while many have been surprised by the rally, the market has been adamant that equity prices were way too low. A simple optical check of the S&P or FTSE charts clearly shows the rally typified by lowered noise levels.

While we enjoy these low levels of noise we can see that the rally is in place. However, all good things come to an end - this will be typified by an increasing level of short-term noise volatility. Rather than tight intra-day ranges, trading ranges will become wider and wilder.

These will be the points for bulls to get nervous and the bears to poise ghoul-like, ready to jump in short.

After a continuation of this rally, a potentially long one, sometime in the next two years (three years at the very outside), we will get another crash. Tracking volatility will be key to avoiding it.

Clem Chambers is CEO of ADVFN, Europe's leading finance and markets website (advfn.com); his financial thriller, 'The Armageddon Trade', is out now (No Exit Press, £6.99)