Stock Trader Types
Being a stock trader can be quite profitable.
Once you have realized that there is a great deal of benefits in stock trading, as well as the backing of valid reasons in your decision to enter the arena of stock trading, it is now time to decide what type of trader type you may be so as to adapt the correct strategy in your future investment profit making!
It is important to note that there are many different trading types in the marketplace. Each new person looking to make money in the market should decide for themselves which type of trader they are and perfect that strategy if it is applicable and profitable as part of their overall financial management.
To learn how to trade stocks, it's important to know the trader types that there are, and the decisions that each type of stock trader makes. Understanding the types of traders is the first step in helping you understand stock movement. Knowing what people do when trading, how they think and how they trade, will help a potential trader to prepare for his/her foray into the stock market jungle by having an understanding of why and how the stock market moves and fluctuates.
Stock Traders and Stock Investors' Roles in the Marketplace
Many people use the words "trading" and "investing" interchangeably when, in reality, they are two very different activities. While both traders and investors participate in the same marketplace, they perform two very different tasks using very different strategies. Both of these parties are necessary, however, for the market to function smoothly.
Dictionary Definition of Stock Trader
Trader: One that trades.
Stock trader: Someone who buys and sells stock shares.
Investor: One who invests.
Looking more thoroughly at the differentiation of an investor as opposed to a stock trader when actually applied to the stock market we can see that :-
A Stock Investor
A stock investor is the market participant that the general public most often associates with the stock market. Stock investors can be firms or individuals who purchase stocks with the intention of holding them for an extended period of time, usually several months to years. They rely primarily on fundamental analysis for their investment decisions and fully recognize stock shares as part-ownership in the company. Many investors believe in the buy and hold strategy, which as the name suggests, implies that investors will buy stock ownership in a corporation and hold onto those stocks for the very long term, generally measured in years.
These investors, who purchase shares of a company for the long term with the belief that the company has strong future prospects, typically concern themselves with two things:
• Value - Investors must consider whether a company's shares represent a good value. For example, if two similar companies are trading at different earnings multiples, the lower one might be the better value because it suggests that the investor will need to pay less for $1 of earnings when investing in Company A relative to what would be needed to gain exposure to $1 of earnings in Company B.
• Success - Investors must measure the company's future success by looking at their financial strength and evaluating their future cash flows.
Both of these factors can be determined through the analysis of the company's financial statements along with a look at industry trends that may define future growth prospects. At a basic level, investors can measure the current value of a company relative to its future growth possibilities by looking at metrics such as the PEG ratio - that is, their P/E (value) to growth (success) ratio.
A Stock Trader
A stock trader is a market participant, either an individual or firm, who purchases shares in a company with a focus on the market itself rather than the company's fundamentals. A stock trader usually tries to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks. The stock trader is usually a professional. Persons can call themselves full or part-time stock traders/investors while maintaining other professions.
Markets that trade commodities lend themselves well to a stock trader. After all, very few people purchase wheat because of its fundamental quality - they do so to take advantage of small price movements that occur as a result of supply and demand. A stock trader typically concerns him/herself with:
• Price Patterns - A stock trader will look at past price history in an attempt to predict future price movements, which is known as technical analysis.
• Supply and Demand - Traders keep close watch on their trades intraday to see where money is moving and why.
• Market Emotion - Traders play on the fears of investors through techniques like fading, where they will bet against the crowd after a large move takes place.
• Client Services - Market makers (one of the largest types of traders) are actually hired by their clients to provide liquidity through rapid trading.
Ultimately, it is traders that provide the liquidity for investors and always take the other end of their trades. Whether it is through market making or fading, traders are a necessary part of the marketplace.
Clearly, both traders and investors are necessary in order for a market to function properly. Without traders, investors would have no liquidity through which to buy and sell shares. Without investors, traders would have no basis from which to buy and sell. Combined, the two groups form the financial markets as we know them today.
Different Types of Traders
The type of stock trader in the market place is only limited to the number of people trading.
Having said that, there are two very broad areas that stock traders can be classified as:-
1. Informed Trader: This type of stock trader is anyone who has information about the right side of the market.
2. Uninformed Trader: anyone who takes the opposite side of informed traders.
From these two very broad classifications there are quite a few trading types with similar traits, but bear in mind, that each individual stock trader will take on traits from other classifications as well, as no one area will be completely correct for each person or trading group. Many trader groups also have similar names. Therefore an overlapping will occur making the stock market what it is ….. an exciting atmosphere made up of many types of traders.
Classification of Trader Types
These are traders who try to predict the near term movements of the stock based on how the company is doing. Fundamental traders spend their days looking through research. It might be research about the economy, a specific sector or a company. But it could also be SEC filings, financial results, etc. There are many possibilities but the end goal is simple. Look at dozens or even hundreds of companies in order to find those that look the most undervalued.
They may try to buy strong stocks after a pullback and vice versa. While fundamental analysis can be a great long term approach to the market it loses its strength in the short term. These traders may decide it is best to combine fundamentals with one of the other strategies like breakout trading or trend trading. Such traders usually will spend entire days trying to figure out why a company’s stock has not increased more. Is it because the company will come out with bad results or is the whole crowd missing something important? Investors are always on the lookout for the next Microsoft.
Buy and Hold Traders
Buy and Hold Traders, also called Long Term Traders, are stock market investors who are buying stocks and holding them for a long period of time. This category most likely constitutes the largest group of people who are buying stocks as it requires the least amount of time spent focused on the stock market.
Typically people who fall into this category purchase a stock based on their calculated criterion and hold it for a longer period of time, this could be months to several years. This category of stock trader is one who may hold a stock during a down point in the stock market believing that once the down trend is over the stock will rise.
Swing Traders use a slightly longer time horizon than day traders, watching a stock for weeks or months before trading. They try to follow the momentum of the stock market when buying stocks. When markets are, in general, moving to the upside swing traders will buy stocks that fit whatever criterion they are using to select stocks, selling when this swing in the market has topped or nearing what they have calculated to be the top.
This type of stock market trading relies on careful monitoring of fundamental and technical analysis. Swing traders often specialize in a certain business or industry so that they become experts in the movement within those stocks. They also have more time to study the company financial reports and industry forecasts. Swing traders will hold stocks a matter of a few days, weeks, or even months depending on the momentum of the stock market. Although swing traders don’t spend quite as much time focused on the stock markets as they are following the momentum of the market, this style of trading still requires a great deal of time spent researching and monitoring the markets.
They also have more time to study the company financial reports and industry forecasts. Since swing trading does not require hours of daily monitoring, it is a good strategy for the trader who wants to make money from stock market trading without turning it into a full time job. Even the study of reports could be done during the daily commute or lunch hour so that the swing trader stays well informed.
Day Traders are investors who generally buy and sell the same stock in the same day. This type of trading is not limited to just buying stocks, they may also buy and sell stock options, currencies, or a whole range of futures. Typically day traders may hold a stock for a matter of seconds or minutes, additionally they may buy and sell the same stock several times during the course of a day. They tend to be out of the market (sell all of their stocks) before the trading day ends to avoid any possible after market gap downs (a situation where a stock may open the next day at a lower point than it closed the previous day). They avoid the risks of long term buy and hold.
Day trading requires a significant amount of time on a daily basis. Generally people who day trade are doing this for a living, spending their entire day at the computer buying and selling stocks. This type of strategy for stock market trading is only effective for day traders, who apply analysis rather than emotion to trading decisions.
The name 'intra-day trader' refers to a stock trader who opens and closes a position in a security in the same trading day. This can be buying and selling to capitalize on a potential rise in a security's value or shorting and covering the short to capitalize on a potential drop in value. Intraday traders capitalize on small moves in the value of a security by using "leverage" or "margin", which basically means borrowing money.
Day traders and intra-day traders are at the top of the risk spectrum. They participate in rapidly changing market conditions, looking for quickly developing profit opportunities. Mostly these traders employ technical analysis to determine when conditions are right to enter either long or short, and then to exit (hopefully with a profit).
With the elevated risk comes the potential for extraordinary ROI (Return on Investment).
Intra-day Scalp Trading
Intra-day scalp trading is a particularly short-term form of day trading. It is generally based on technical analysis of indicators such as moving averages, MACD, momentum oscillators, Fibonacci sequences, etc. Trades are often held only for minutes at a time, and sometimes even shorter than that.
Channel trading is a powerful yet often overlooked form of trading that capitalizes on the tendencies of markets to trend. The channel trader combines several forms of technical analysis to provide precise points from which to buy and sell, put stop-loss and take-profit levels, etc …… refer to the definition of channel trading.
Price Action Traders
Keeping things simple can also be an effective methodology when it comes to trading. There are groups of traders known as price action traders who are a form of technical traders that rely on technical analysis but do not rely on conventional indicators to point them in the direction of a trade or not.
These traders rely on a combination of price movement, chart patterns, volume, and other raw market data to gauge whether or not they should take a trade. This is seen as a "simplistic" and "minimalist" approach to trading but is not by any means easier than any other trading methodology. It requires a sound background in understanding how markets work and the core principles within a market, but the good thing about this type of methodology is it will work in virtually any market that exists (stocks, foreign exchange, futures, gold, oil, etc.).
An Option Trader is also known as an Options Trader. It is anyone who buys and sells options in the capital market.
Option Trading, or options trading, is the trading of stock options over an exchange. As options trading is most commonly conducted through online option trading brokers, it is also commonly known as Online Options Trading or even Online Option trading.
There are many people who confuse options trading with futures trading. Futures and options are two distinctly different derivative instruments with their own characteristics.
Options trading means that instead of trading stocks, you trade the options that are offered on these stocks.
There are 4 main types of futures traders in the futures market, creating the liquid futures trading environment that we see today. No matter what you choose to do in futures trading, you will inevitably fall in one or more of these types. The 4 types of futures traders are really classified based on the purpose of their trades rather than the actual trading strategy itself as the same futures strategy can be applied for various purposes. The 4 types of futures traders in the futures trading market are; Hedgers, Speculators, Arbitrageurs and Spreaders.
Online Stock Traders
Hedgers do with futures contracts what futures contracts were initially designed to do when they were first developed along the rivers of Chicago, which is to hedge against price risk. You are a hedger when you go short on futures contracts while owning the underlying asset or other futures contracts of the same or related underlying in order to protect your existing positions against price fluctuations.
Speculators form the backbone of the futures trading market we see today. They provide liquidity and activity in the futures trading market through their day trading or swing trading strategies, buying and selling futures contracts outright in order to speculate on a strong directional move. This is also the most dangerous way of trading futures as the price of the underlying asset could just as easily come around and put your position in a loss deep enough for a margin call.
Arbitrageurs are futures traders that are in the market in order to spot price anomalies between futures contracts and their underlying assets in order to reap a risk free return. Arbitrage is another huge source of volume and liquidity in the market as it typically takes an extremely big fund and big trading volume in order to return a worthwhile profit in arbitrage. Arbitrage is such a competitive area right now that super computers with powerful programs to spot such opportunities are set to perform such arbitrage automatically.
Spreaders are futures traders that specialize in trading futures contracts in combination with other futures contracts or underlying assets in order to reduce risk and to extend profitability. Such complex futures positions are what is known as "Futures Spreads" or "Futures Strategies". This is a very professional and specialized field that has only recently been made known to the general public and makes use of the difference in price and rate of change in price of different offsetting futures contracts in order to create futures positions that move within certain limits and have a much higher chance of profit with a lot lower commissions.
Online stock traders place buy/sell orders for financial securities and/or currencies with the use of a brokerage's internet-based proprietary trading platforms. The use of online trading increased dramatically in the mid- to late-'90s with the introduction of affordable high-speed computers and internet connections.
Stocks, bonds, options, futures and currencies can all be traded online.
Another benefit of online trading is the improvement in the speed of which transactions can be executed and settled, because there is no need for paper-based documents to be copied, filed and entered into an electronic format.
Option Seller Trader
Instead of being one of the many people gambling by buying stock options these traders become the house. They take advantage of the fact that 80% of options expire worthless by selling out of the money option. No other traders have as high a probability of being right as they do and they take advantage of it. Their goal is to make a consistent 5-10% a month off of their money.
This type of stock trader can have a longer term approach to trading. They will try to find a great up trending stock, buy it and ride it until the trend changes. After all if a stock keeps going up wouldn’t it be great to just buy it and let it double, triple, do what it does.
Because up trending stocks go through stages of higher highs and higher lows these traders should have a loose stop and should not be worried about outside factors such as their stock being overextended, as long as the stock is still going up.
A Range-bound Trader
Range-bound trading is a purely technical method of predicting a stock's short-term highs and lows. Range-bound traders are more active in a range-bound market, where they trade stocks within a defined channel. A more detailed explanation about range-bound traders is available HERE.
For information on Strategies for a Range-bound Market! - click here.
A Break-out Trader is a stock trader who is looking for strong stocks. He buys when a stock has just broken out and follows it up because breakouts on high volume are normally a strong buy signal, especially in bull markets. These traders can sometimes find stocks that move astonishing amounts in short periods of time.
This stock trader often has his/her own set of rules to help determine if a breakout trade is a false signal or a great buy. They may decide to add fundamental analysis or other indicators to help weed out breakouts that produce false signals.
Momentum traders generally agree that attempting to determine the absolute value of a stock is pointless. They tend to say the absolute value of a stock is obvious: It's the price the stock just traded at-that's what your stock is worth.
The "last price theory" is both obvious and worthless. Obvious because the stock value has just been demonstrated and worthless because in investment terms, it gives you know idea what the stock is going to be worth in the future.
Momentum traders fundamentally rely on three types of information: Moving Averages, Market Direction and Elliot Waves.
The idea is to ride the momentum of a current stock move. The basic idea is that a stock in motion will tend to stay in motion.
KISS is an acronym for the design principle "Keep it simple, Stupid!", meaning "Don't be stupid, keep it simple!". Other variations include "keep it short and simple" or "keep it simple and straightforward".The KISS principle states that simplicity should be a key goal in design, and that unnecessary complexity should be avoided.
I particularly like this type of trading at certain times, and the stock trader that adheres to this principle must be aware that it does not mean throwing out all the technical analysis and indicators but to simply (as it says) “KEEP IT SIMPLE”.
The most profitable trades, a great deal of the time, are those that are the simplest to spot. This type of stock trader views this scenario as one of the simplest in nature, but realizes that it is the smartest type of trade because it produces the greatest profits.
The Price Trader
The price trader is the analyst who tries to figure out exactly what a stock is worth.
Price traders are the most common type of trader in the stock market. Price traders buy a stock based on a fixed price. For example, they study Apple Computer (AAPL) and determine that based on the company's public information the stock is worth $100 or $125 or $97.25 a share. Price Traders buy the stock if it is below that value and sell the stock if it is above that value.
Because of price traders, stocks often trade up to a certain value and stop. Stocks also tend to trade between values quickly. For example, stocks -any stocks- tend to be more volatile when their stock price is between $45 and $50 as well as $90 and $100.
Some stocks also tend to "trade on the fives and tens" - meaning that the stock will trade at $5, move very quickly to $10, and then move very quickly to $15. This is due in part to option strike prices which have either $5 or $10 separation in strike prices. Stocks with $5 option strike prices will often trade at the $2.50 level as well. This phenomena is often seen most clearly at the end of a month when option expiration occurs.
Price traders never arrive at the same value for a stock. Given the thousands, perhaps millions, of individual criteria that can affect stock value, the only way two price targets end up being the same is by agreement or cohesion among analysts. As such, stocks tend to move quickly between common price targets.
In the end, the systems by which we buy and sell stocks force us to be price traders and people tend to enter round numbers into these systems. This creates a situation where stocks tend to trade to round numbers: $1, $0.50, $0.25 and $0.75.
Pivot Traders basically say that the exact value (or price of a stock) at any given time is unknowable. You cannot say that your stock is worth $100 because there are too many variables to contend with. Pivot traders tend to say that a stock moves between popular values for that stock based on past company performance.
Based on the unknowable premise, a pivot trader tends to say a stock will trade to levels that it has traded in the past and then pivot - either turn around or "breakthrough" that support or resistance level.
So, pivot traders look at past performance as the best predictor of future performance.
Traders look at charts a bit, and even more into company fundamentals, but the biggest factor that remains is a general feeling, momentum not only in the individual stock but in the company itself. The trader may look at numbers and find specific opportunities but tends to develop a general feel for many of these companies they wish to invest in.
While this category of investing is maybe not well recognized, many traders fit the pattern.
Technical traders, in general, are traders that use stock charts to trade. This type of stock trader relies on factors such as momentum, patterns, moving averages, etc. The basic premise is that all assets move based on offer and demand more than anything else. They would not even care to look at which stock or commodity they are trading; they only require the trading data to decide if they want to buy or sell.
High Frequency Traders
High frequency traders,fitting into the technical traders category, is a term used for traders who mostly use technical factors.
An active trader is the type of stock trader who sometimes borders on the fanatic. They read everything on investing, study the stocks, and subscribe to magazines, associations, or newsletters. Their motivation can be to flip stocks and make money fast, or it can be the satisfaction of finding a treasure missed by Wall Street pundits. Whether driven by wealth or ego, this type of investor turns investing into their hobby and even passion.
These investors learn how to read financial statements, market predictions, economic analysis reports, and editorials. They learn the names of the world's best economists, and are familiar with the London and New York Times Newspapers.
These investors prefer stocks that are rising and promise to be a forerunner for future outperformance. They have one focus, accelerating earnings, from a company which has tapped into a new product or innovation that promises to hit the market hard. There are many approaches to picking stocks, based on a number of factors including stock price behavior, markets, and earnings growth.
This type of stock trader is often interested in investing their money, but they do not want to spend their weekends studying financial statements, markets, and even weather reports. This type of investor laughs at the good luck mantras and charms used by some investors. They are often happy to put their money in the hands of a broker and walk away.
The passive trader creates a plan, researches stocks, invests, and then patiently waits for a return in the future. A passive investor takes a look at the company's value, assets, debt, and financial health. They consider market and competition when estimating the company's opportunity for success. They are not aggressive, or looking for a quick gain.
As long as their losses are not in the high-risk level, they leave their portfolio alone. They follow the 10% rule when estimating acceptable loss. Once a stock falls 10% below what they paid, it is time to sell to the bargain hunters.
Bargain Hunter Trader
These traders circle like eagles waiting for the weak and wounded to fall, then they pick up the pieces. Many companies owe their survival in hard times to the bargain hunter. Kmart is one company that pulled through and recovered after Wall Street left it for dead.
The Player Trader
At first glance this person may not seem to have a viable place in the market, but looks can be deceiving. This person wants to roll their money over and trade stocks constantly - that is part of the game. They are only interested in research and learning as long as there is money to play with.
Unlike value traders, news traders do not estimate value of an instrument from first principle and all available data. Their object is merely to estimate how value will change in response to their news information. They estimate total instrument values by adding to current prices their estimates of how their news changes prices.
• Time constrained since position should be taken before information becomes publicly available.
• Faster price adjusts to trades, discouragement to further informed trading and decreases realized spread.
Sentiment-oriented Technical Traders
When technical traders trade in response to predictable price patterns (“judge market sentiment”) caused by uninformed traders, they effectively act as dealers or order anticipators.
If they offer liquidity to the uninformed traders they are essentially dealers. Their trading tends to make the prices more informative.
Information-oriented Technical Traders
An information-oriented technical trader is the stock trader who profits by identifying predictable price patterns that result when other traders make mistakes. Technical trading strategies that exploit informed traders’ mistakes are rarely consistently profitable. Strategies that worked well in the past fail when informed traders learn from their mistakes. They buy extreme winners or sell extreme losers.
Market Manipulators and Bluffers
This stock trader profits by disseminating misinformation through media, rumors, prices or volumes.
This type of stock trader seeks assistance from financial analysts, statisticians, actuaries, macro-economists, industry economists, market professionals, accountants, engineers, scientists, computer programmers, librarians, and research assistants.
This type of stock trader simultaneously buys undervalued and sells overvalued instruments.
Unsuccessful Types of Stock Traders
Opposite the successful day traders who trade with the necessary moderation, there are those who trade excessively without realizing that they are signing up for sure losses….their money disappearing into the dark, blue yonder. Here are two types of over traders:
Type I: Technical Over Trader
Novices in trading justify their actions by the technicalities of this field. Many of them find some technicalities working to their advantage. They then make pre-determined positions and look for some indicators to confirm their choices.
Type II: Impulsive Over Trader
People who make use of non-statistical or non-mathematical data often rely on other people's opinions, on the news, on their personal observations and hunches and advice by so-called experts or gurus. The problem with these is that they cannot compensate for quantifiable data and that the discretional over trader finds it hard to stay put because of them. He cannot stand inactivity thus he has to satisfy his compulsion to trade.
The lack of assessment of sufficient indicators and enough technical knowledge is often the downfall of a trader.
They act late and then lose because they tend to buy when prices are already high and sell when prices are already low.
No matter which style of stock trader you fall into or feel best matches your stock buying interests, they all carry risks to your financial well being.
All in all there are many different strategies. It is not a one size fits all market. Anyone looking to join the list of stock market traders and make money in the short term should decide which strategy or strategies work best for them.
There is a place for all traders and investors, and while there are winners and losers in the market, the important thing is to pick a comfortable place and don't let anyone force you out of your comfort zone, particularly if you are doing well.
Success is simple. Do what's right, the right way, at the right time.
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