A Guide to the Different Types of Traders
Depending on your type of personality, your daily lifestyle and your financial or your trading goals will depend entirely on what kind of trader you are.
There are many types of traders, and each one is individualized not only by their approach but also by their personality traits.
Some traders enjoy the hurriedness and overnight safety that day trading offers, whilst others prefer the much less stressful, marathon approach to position trading. However, it’s crucial that different traders select the best style for them to maximise their success.
In this guide, we’ll mostly focus on outlining the different types of forex traders. Usually, forex traders fall under one of six trading types: Algorithmic Trader, Day Trader, Event-Driven Trader, Position Trader, Scalper and Swing Trader.
However in addition to picking their trading type, traders must also decide whether they will be fundamental traders, or technical traders.
Fundamental vs Technical Traders
Trading decisions mostly fall into two categories: Fundamental analysis and technical analysis. Whilst there are significant differences between them both, fundamental analysis is more theoretical, whilst technical is more practical, so neither one is “better” per say.
What is a fundamental trader?
Fundamental traders analyse securities by evaluating the intrinsic value of the stock. Factors to be taken into account when performing the analysis include assets, earnings and expenses.
In other words, fundamental traders seek to estimate the fair value of a security based on the balance sheet, the supply and demand, as well as whether it has been over or under priced in the market.
Fundamental traders also take into account things that could affect the stock, like for example the release or development of new products or services. They are also known to run comparisons of the current prices of stock against others within the same industry by selling similar products and evaluating the difference between the two.
What is a technical trader?
Technical traders use price data to identify patterns on trading graphs that could indicate when a change in normal price behaviour has occurred.
Technical traders then use these insights to create theories in order to predict which way the market could move next.
However within technical analysis there are a huge variety of technical indicators, all that come with advantages and disadvantages.
Some indicators may only apply to specific circumstances and individual stocks. Others may only be useful for predicting the market movement of certain industries.
Whilst technical indicators therefore do have drawbacks in their precision, they are good at identifying which stocks are potential candidates for further, more detailed analysis. Due to this, sometimes technical analysis is viewed as a useful starting point.
Types of Traders:
Once you’ve decided whether you’re more comfortable with fundamental or technical analysis, it’s time to decide which trading type best suits you.
The techy traders. Algorithmic traders use specially designed computer software to enter trades for them at the best possible times and prices. Algorithmic traders can either code algorithms and instructions themselves, or purchase pre existing products.
This type of trading suits those comfortable utilising technology in their trading careers.
Mathematical: Algorithmic traders tend to be more inclined to use technical analysis, and therefore often must possess a keen eye for the technical charts. In addition, the reading and understanding of algorithms to execute trades means a maths brain is all but an essential requirement.
Tech-savvy: Often algorithmic traders will either code in their own high-performing algorithms, or they’ll purchase programmes. Whichever method Algorithmic Traders choose to use, they must have a good technical understanding of coding languages like Python and CSS to correctly use a piece of trading software.
Technical: The type of analysis required for algorithmic trading means its best suited to those with a technical mindset in order to read and understand charts, but also to implement the technologies required for the programming.
Overall: Technical traders can benefit greatly from a sense of convenience. If a trading programme is coded and functioning correctly it can be a quick and easy way to enter trades, often working out the best trades and times for the trader.
However, the technical and mathematical expertise required don’t make it open to everyone, and traders would benefit mostly from coding or programming experience to be confident in the software.
The 9-5 traders. Day traders watch the charts all day long and only close on positions before their trading day ends.
A benefit of Day Trading is that you don’t hold positions overnight, which leads to a much more comfortable night's sleep because you lessen the worry of waking up to bad news. At the end of your day you either accept a profit or a loss, then move onto the next.
Day Trader Character Traits:
Patience: All day, Day Traders just sit, waiting and watching the charts. Therefore Day Traders must possess the patience required to stay alert whilst waiting for good entrance opportunities to present. Plus, sometimes Day Traders can go whole days without even making a trade, so patience and stamina are applicable virtues here.
Discipline: In the occasional days when Day Traders won’t make a trade, they must possess the discipline to avoid simply trading out of boredom. In addition, when on a success streak for example, Day Traders need to have enough self-discipline to avoid over-trading, whilst being able to stick to, and consistently execute, their trading plan.
Mental Stamina: Day Traders will experience both non-trading days, as well as bad trading days where traders have watched the charts all day only to finish at a loss. Good day traders must have the stamina to pick themselves up and let the bad days go, otherwise these can cloud new, potentially good days.
Overall: The shorter, more work/life balance friendly, time frame involved in Day Trading means that Day Traders can be at risk of trading during periods of randomly fluctuating price movement. This makes it harder to predict market movements, and even recover from bad trades because of needing to close by 5pm.
However, traders who possess patience, are mentally strong and well disciplined fit the Day Trading description well. In addition, this is the perfect type of trader for those who seek a good work/life balance and are happy to spend their days just watching the charts.
The short term, instantaneous traders. Scalpers make trades as quickly as every few minutes or seconds, aiming to net a profit by capitalising on the differences between the spread (“Scalping”) - otherwise known as the buy and sell prices of securities.
The ideology behind scalping is that over time, numerous small profits can add up to bigger sums if vast quantities of trades are successfully executed every minute of every day.
Quick Thinkers: Decisions in scalping need to have been made by the time it’s taken to read this sentence. Everything is quick fire and rapid, with trades needing to be made with full confidence and without hesitation. As a given scalpers must possess the abilities to think quickly and react even quicker than that.
Impatience: Incredibly traders who lack patience make for excellent scalpers. This is because they will exit trades quickly if a previously profitable trade looks to suddenly be moving against them, thus, saving their profit.
Focused: Scalpers don’t rest for a minute. To be trading every quickfire minute requires constant concentration to make sure profitable opportunities are entered, exited, and not missed.
Overall: Whilst the large bulk of scalp trading nowadays is performed by specially developed computer algorithms which have evident speed advantages over manual traders, there is still a call for scalp traders.
It’s not rookie friendly due to the intense speed and pressure of the trades, but if you’re a quick thinker, decisive action taker and you can hold your concentration in the chaos, scalp trading is still a very profitable trader type.
The medium speed traders. Unlike the previous two trading types, swing traders very rarely rush. Swing traders can hold trades anywhere from a day to two weeks at a time, and aim to make profit from smaller trends within markets often overlooked by investors.
Thanks to the perhaps more relaxed nature of swing trading, swing traders only need to review their trading positions sporadically throughout the day.
Patience: As swing traders will hold trades open for indefinite amounts of time, they must possess the patience to be able to let profits run without making a panicked or uninformed decision from boredom or minor market movement.
Laidback: Swing trading only requires a small daily commitment, which means traders need to be able to be present in their day-to-day lives. Traders therefore must be relaxed enough to not be anxious of what their trades are doing whilst they are away from their laptop.
Stamina: Just like other trading types, Swing Traders still need to have discipline and consistency to make good trades across larger periods of time. Plus, as their trades run indefinitely they must remain just as focused as they were when first entering the trade.
Overall: Swing Trading is great for those who want to trade but don’t want to make it their lives. Its flexible approach means it can make you a profit in the background, whilst you either balance it around your work, travel or lifestyle.
The long game traders. Position traders are similar to Swing Traders in that they hold their trades for long periods of time. However, Position Traders can hold trades anywhere from several weeks to years.
As they possess the longest holding position of all trading types, position traders are more focused on a stocks performance over time, rather than its instant potential gain - think Apple in 1997.
Patient: Position traders by nature have to be the most patient of them all. As a position trader your money will often be locked up for long periods of time, but beyond that, you’ll be playing the waiting game. Patience is key to profit here.
Systematic: As the trades are longer term, knowledge of the measurement of fundamental factors could prove beneficial. Advanced analytical skills help, as does having a process to evaluate which trades to enter and when exactly, in the distant future, to exit them.
Strategic: As Position Trading is a long game form of trading having a strategy is essential. Traders must be able to strategically evaluate which trades to enter, and when to exit them, as well as strategizing a potentially successful trades lifecycle.
Overall: Chess players used to strategically planning their next move, or those with huge amounts of patience are best suited to Position Trading. Position Traders can also fit their trading around their lifestyle, so it makes for a flexible trading option.
Due to the amount of analysis and evaluating involved, it is probably best suited to those with an affinity to fundamental trading.
The opportunistic traders. Momentum traders identify large size price movements and increased volumes where the volumes equal the same amount a security was traded over a certain time period.
Put simply: Momentum traders aim to make profits by riding on the back of significant momentum.
Opportunistic: Such momentum waves typically only occur when the market is taken by surprise off of the back of a significant event, like for example, Brexit. Where everyone else sees panic, momentum traders see opportunity. Therefore a keen eye and a sense of calm to remain confident when entering uncharted territory are key Momentum Trader personality traits.
Curious and Astute: Whilst the market may be surprised, Momentum Traders shouldn’t be. A sense of curiosity and interest in the world and its economic events makes for good Momentum Traders as both these traits help to plan for various possible profitable outcomes.
Quick Thinking: When such significant price shifts occur they usually occur quickly, so momentum traders must be able to think quickly and act decisively and rationally in highly pressurised situations.
Overall: Momentum trading is unpredictable. Because of this, Momentum Traders must be astute enough to identify potential market waves, whilst also quick enough to jump onto them at the right time.
There’s no set time frame either, which potentially makes it an ideal trading type for someone looking for flexibility.
Choosing the right trading style isn’t an easy task, but it is crucial if you wish to achieve long term success.
If you’re caught between styles, there’s no harm in trying out different types as long as you ensure to set your limits and watch your trades.
Despite all this, no matter which style of trader you go on to be, the core principles and strategies of trading remain the same. All that differs is your personality and the timeframe!
No matter which trader you think you could be, kickstart your trading career right here with Alphachain Academy.