For some who play in financial markets, volatility is a dirty word and is something they seek to avoid. However, volatility can be the friend to the small, nimble trader who is able to take advantage of price movements and make large profits quickly.

Taking advantage of volatility requires preparation. Successful traders will have done work before they begin trading to understand where they can find appropriate levels of support and resistance. This preparation allows them to respond quickly to price movements. Those that dislike volatility often find themselves scrambling to make decisions before prices change too much. By setting buy and sell points ahead of time, traders can shorten the decision-making process, which allows them to take advantage of quick moves.

Participating in volatile markets can be very profitable. Because of the rapid price movements, money can be made quickly. On the other hand, money can also be lost rapidly. During high-volatility markets, using stop losses to prevent outsized losses is a very good idea. Manual trading can take time, during which prices may have changed dramatically. Since stop losses are executed automatically, generally by a computer-based system, they provide protection, and greatly reduce the chance that a position can fall even further than originally planned.

Another way to automate trading during volatile markets is by entering into limit orders, where a trader decides in advance to buy a position if it hits a certain price target. Because of the rapidly moving prices, the price at which a trader wants to buy a position may not be the price at which the trade is executed because of movements that occur during the decision-making process. Limit orders greatly reduce the chance that this occurs, since it shortens the decision-making to usually a computer algorithm.

Investors with longer time horizons can also make money during volatile markets. In times of heightened fear, strong positions get liquidated for reasons that often do not relate to the underlying securities. For instance, a trader may want to sell one position to meet a margin call, but is not able to because there is not enough liquidity in that name. In this case, a different security is sold, potentially creating an entry point.

Making decisions in quickly-moving markets does carry risks. An old market saying is to buy low and sell high, which leads to profit. Unfortunately, as prices move very fast, it can be hard to identify if the price is actually high or low. Traders might sell a position, expecting it to fall further, only to watch it rebound to new highs. The same trader might then buy the position back right before it falls again. This process of buying high and selling low is known as being whipsawed by the market and is a common fear of many traders.

Another condition to be aware of during volatile markets is a widened bid-ask spread. Volatility creates risk, and so brokers are loath to hold positions that move greatly before they can find another trader to take the other side of the trade. Because of this, the spread at which brokers execute trades widens. Rapid trading during volatile times can be more expensive than usual.