10 Common Types of Traders
No matter how new you are to investing, you probably already know that everyone has a distinctive trading style. However, most investors build their unique strategy by selecting their favorite techniques from an array of common trading toolboxes. Review the common types of traders to see where you fall and hopefully glean some new tips about how to navigate the market.
What Type of Trader Are You?
Your trading strategy depends on your personality, financial goals, and risk tolerance, as well as the amount of time you can devote to actively investing each day.
Begin forming a distinct trading methodology of your own by exploring ten common types of traders and their strategies, risks, and rewards:
- Arbitrage trader: An investor who simultaneously buys and sells shares of the same financial asset from two exchanges at two different prices.
- Buy-and-hold trader: An investor who takes advantage of long-term growth by holding stocks for months or years.
- Day trader: An investor who buys and sells shares in the same day to benefit from price volatility.
- Fundamental trader: An investor who makes trading decisions based on background research about the company, including financial reports.
- Market timer: An investor who uses both fundamental and technical analysis to predict market changes and drive short-term trading decisions.
- Noise trader: A short-term investor who uses technical analysis only and trades based on chart patterns and data trends.
- Position trader: A less active type of trader who uses charts for monthly rather than daily or weekly analysis.
- Scalpers: Traders who make hundreds of high-volume trades to take advantages of price fluctuations that occur in hours or even minutes.
- Sentiment traders: These traders look for trend indicators and then trade in the same direction as the market.
- Swing traders: These short-term traders try to benefit from price changes at the end of a breaking trend.
These investors buy and sell assets at the same time to take advantage of discrepancies in price. Inefficiencies in the market allow individuals to hedge their bets by using this strategy to play two different markets against each other with similar financial assets. For example, they can buy a stock that trades on more than one exchange at different prices. They will purchase it low on one market and sell it high on the other.
The incorrect market pricing that fuels arbitrage trading has become rare with technological advancements. Errors like these are usually detected and corrected quickly.
These traders are also called long-term traders because they buy assets at a low price and hold them for years to take advantage of the market’s historic price rises over time.
If you contribute to an individual retirement account or a 401(k) plan through your employer, you already participate in long-term trading.
This strategy is popular among beginners because it carries the lowest level of risk and requires the least amount of active trading activity and analysis (or none, if you decide to use an automatic online advising platform).
This is one of the most common active trading styles and, as the name suggests, describes the practice of buying a financial asset and reselling it before the market closes the same day. Day traders are usually professional investors, although more new traders have been taking advantage of this strategy with modern online trading platforms. Closing before the end of the day prevents loss in case the stock price drops before the market opens (a situation called gapping down).
The fundamental trader reviews a target company’s background, history, and current financials (called its fundamentals) to drive and time stock trades. While some fundamental traders do focus on short-term trades, most rely on the tried-and-true long-term buy-and-hold strategy. If you love research, facts, and logic, fundamental trading may be a good fit for you, provided you have the time to dedicate to due diligence. The downside of this strategy is that the markets don’t always behave in accordance with logical expectations.
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Market timing traders try to predict and profit from the fluctuations of the market, either using economic data, technical indicators, or a combination of both. Opinions differ about how successful this approach can be, but significant profits are available for those who get good at guessing and don’t mind the risk. Generally, market timing is a short-term investment activity.
For best results, you’ll need to devote lots of time to analyzing the market so you can plan and execute trades. The most advantageous market timing happens during an unprecedented bull market, such as the recent real estate and tech booms.
Unlike fundamental traders, noise traders completely ignore a company’s fundamentals when making trading decisions. Instead, they look solely at financial trends in an attempt to profit off of short-term trades. Noise traders rely on technical analysis, which involves reviewing the historical charts of a stock or market to look for trading volume, price history, and other indicators of future behavior. Most traders use at least some form of technical analysis when making market moves. However, learning technical analysis charts and patterns and constantly checking for potential up or down indicators can be time consuming.
Another active strategy, position trading involves the analysis of daily to monthly charts to find trends in the market. Based on the current movement, the position trader will hold an asset for anywhere from a few days to a few weeks. With this longer time frame, position trading requires much less active monitoring than day trading or swing trading does.
Using the charts, these investors look for trend indicators such as lower highs and higher highs. They aim to go with the flow of the market to benefit from volatility. Once they spot a trend, they jump in quickly, then get out just after it breaks. This can be difficult in quick-changing markets.
This type of trader holds securities for just minutes before flipping them to profit from small price moves throughout the day. Although profits may be small for each trade, scalpers conduct a high volume of trades each day in order to come out ahead — sometimes dozens, sometimes hundreds of these so-called micro-transactions.
Usually, these investors aim to condense their activity in the business parts of the trading day to take advantage of increased volatility and volume. Scalping works best in a liquid market and requires the trader to find tight spreads that will optimize potential profits. Often, scalpers use this strategy to trade currency pairs. They must be comfortable with the stress of a high-pressure technique requiring split-second trading decisions and have the ability and time to conduct necessary research and analysis.
While noise traders use technical analysis to profit by trading against market trends, sentiment traders let these indicators guide them in the same direction as the market. These investors go with the flow and implement both fundamental and technical analysis in trading decisions. Some of the main challenges facing sentiment traders include the difficulty of accurately predicting market movements, price change volatility, and the fees and commissions associated with frequent trades.
The swing trader attempts to benefit from the price volatility that often occurs at the end of a breaking trend. They develop their own trading strategy based on a combination of fundamental and technical analysis to decide when to sell or buy an asset. Usually, this personal algorithm strives to find the peak or nadir of shifting prices. They tend to hold positions longer than day traders do, usually for a few days, but sometimes for several weeks.
Swing trading works best in a market that’s ‘sideways,’ or limited within a specific range. Some of the most important technical analysis tools for this type of trader include the stochastic oscillator, the relative strength index, and the moving average convergence divergence. Many swing traders specialize in one industry or type of financial asset so they become intimately familiar with its price movements.
Which of these types of traders appeals to you most? If you’re new to the market, consider starting your strategy there and adapting it over time to fit your needs as you learn more about trading and develop your instincts.