Financial markets are a multifaceted world that offers plenty of opportunities to make money through trading. The first question you have to address is where and how to start. Figuring out what type of trader to be is a fundamental decision you have to make when starting your trading career. However, it’s also one of the more complicated choices to make. This guide explores the eight types of traders that dominate financial markets. It’s crucial information that will help you find out where you might excel. Hopefully, by the end, you’ll know which trading style might bring you the best results.
One of the most popular ways to differentiate the various groups of traders is based on the time frame they trade. Some traders prefer to constantly monitor the market and trade with higher frequency. Meanwhile, others prefer to trade just once or twice per day.
An alternative way to look at this is by considering the average holding period for traders’ open positions. For example, a day trader buys and sells within minutes or hours. A scalper can hold an open position just for a couple of seconds. A position trader holds until a trend peaks, while a buy-and-hold investor is in for the long term.
The different trader profiles use diverse strategies to identify the most lucrative opportunities in the market. Furthermore, they rely on various trading systems and infrastructure to make the most out of their trades. Some trade just a single asset, while others buy and sell several instruments at once. Beginners or more risk-averse traders can buy and sell only on a single venue. Conversely, advanced or more aggressive market participants prefer to apply arbitrage trading strategies.
Let’s deep dive into the specifics of each group and explore the intricacies of their trading strategies.
Day traders are focused on exploiting trading opportunities without leaving open positions overnight. Alternatively, all their trades are opened and closed within a single trading session. The average open time of a day trader’s position is usually less than an hour. These trades might remain open for a couple of hours. However, they are never extended into the next trading day.
Day traders usually prefer more liquid instruments like stocks, forex, and futures. These are the assets that allow them to quickly get in and out of their trades. In addition, their toolbox of strategies includes range trading, arbitrage trading, high-frequency trading, noise trading, and more.
Day trading is a risky activity. It often relies on high amounts of leverage to scale the potential profit and capitalize even on the small price movements. Due to this, day trading requires an advanced understanding of market mechanics and a good risk management strategy. Furthermore, it requires substantial initial capital so that the trader can apply more diverse techniques and capitalize on the market opportunities more effectively (although we have a hint of what you can do to start day trading with just $500).
Day traders often follow the market-moving events in real-time to open short-term positions and take advantage even of the slightest price movements.
The goal of the day trader is to profit not from extended market runs but from volume. Due to this, their returns might often range between 80 to 100 pips per trade.
What you should know: To become a successful day trader, you should have extensive knowledge of the market, paired with self-discipline. It would be best if you don’t let your emotions control you and stick to your trading strategy.
Swing trading is a trading style that aims to capture short- and medium-term gains over an extended time frame. It is among the most popular forms of active trading. Swing traders look for medium-term opportunities using various forms of technical analysis. They usually hold their positions open for a couple of days or even up to a couple of weeks to profit from an anticipated price move.
Swing trading requires fewer efforts and time dedication than day trading. The reason is that it maximizes short-term profit potential by capturing the bulk of market swings. The essence is to successfully identify where the asset’s price is likely to move next. Next, you enter a position and then capture a chunk of the profit if your market forecast materializes.
The most successful swing traders aim to capture just a part of the expected price move. Once they do, they move on to the next opportunity. They rarely aim at profiting from the entire market move. Instead, they prefer to make smaller but steadier returns before the market turns against them.
Swing traders primarily rely on technical analysis to identify trading opportunities. Similar to day traders, they might often utilize fundamental analysis and analyze price trends and patterns to complement their strategies.
What you should know: Swing trading exposes you to overnight risk, where the price could gap and open the following session at substantially different levels. Establish a risk/reward ratio based on a particular profit target, stop-loss, and stick to it. You can also aim to take profits or losses based on a technical indicator or price action movements. Otherwise, you might end up chasing opportunities that go against your strategy or remain within a trade for an extended period of time.
Position traders buy assets the value of which they consider likely to appreciate in the long-term. As a result, their strategies aren’t too concerned about short-term price fluctuations. Instead, they focus on the macro trend and the growth potential of the asset.
Position traders are trend followers. They identify a trend, open a position, and keep hold of it until the market movement peaks. This type of trader relies on a combination of technical and fundamental analysis tools. They keep track of macroeconomic factors and the dominant market trends.
If we compare position trading with day trading, we can say that the number of trades the latter places per day often exceeds the number of trades the former makes over the span of a couple of months or even a year. This means that, with position trading, you will be buying and selling with a much lower frequency. For example, many position traders don’t exceed 10 trades per year. Due to this, you also won’t have to keep track of the market 24/7 or react as soon as a market-moving event occurs.
However, this doesn’t mean you shouldn’t monitor the market frequently, especially if you haven’t built a proper risk management strategy from the start. The successful position trader identifies the preferred entry and exit points for each of his intended positions in advance. Once the position is opened, it should be complemented with the appropriate stop-loss orders.
Don’t mistake position trading for long-term investing
Position trading is often confused with a buy-and-hold strategy. While they have some similarities, in reality, most buy-and-hold strategies can span over the course of a couple of years (i.e., planning for retirement with a long-term portfolio). On the other hand, with the position trading style, most positions are closed once a trend peaks. These trends might often be within a couple of weeks or months.
What you should know: Position trading is an excellent opportunity for investors as it isn’t as intense as day and swing trading. However, don’t forget that as a position trader, you should still keep track of the short-term trends and the intraday news as they might distort the long-term profit potential of your investments.
Scalpers are the epitome of a short-term trader as they specialize in profiting from small price changes and making a fast profit off reselling. Everything that we said about day traders is even more valid for scalpers as they buy and sell at a higher frequency. Successful scalp traders maintain a much higher ratio of winning trades versus losing ones.
Usually, the average duration of a scalp trader’s open position can range between a couple of seconds to a few minutes, but rarely longer. Often, a scalper can execute over a hundred trades per day. You are now probably thinking of how it is even possible to buy and sell every few seconds. The truth is that the majority of the short-term scalping strategies are facilitated by advanced computer algorithms.
What sets scalping apart from other trading styles?
Don’t think of scalpers as some frantic traders who are buying and selling everything out there just for the sake of generating volume. Just the opposite – they have mastered their target markets and have well-established risk management strategies that allow them to maneuver quickly and efficiently.
Speculators without a plan are like a general without a strategy, and therefore without an actionable battle plan. Speculators without a single clear plan can only act and react, act and react, to the slings and arrows of stock market misfortune, until they are defeated.”
– Jesse Livermore
Similar to day traders, scalpers don’t target huge one-off profits. Instead, they try to ensure a steady stream of smaller gains they can multiply based on the traded volume. The core idea of scalping is that it is better to build your wealth over time with frequent small additions.
The fact that scalpers rely on the sheer amount of profitable trades instead of their individual gains means their strategies are designed to exploit even the smallest opportunities in the market.
What you should know: Scalp traders are probably the most dedicated market participants out there. They spend hours glued to their monitors, closely tracking the markets they are interested in, the relevant news, and market noise that might distort the perspective for their portfolio. If you are just starting, we advise you to keep scalp trading at the bottom of your list of priorities. It requires complex skills, expertise, complex tools (a live feed, a direct-access broker, a tech infrastructure), and most importantly – the capability to place trades with high frequency.
Intraday trading is another term used for day trading. The word “intraday” basically means “within the day.” In many cases, both terms are interchangeable. Similar to day traders, the intraday ones also don’t keep open positions overnight. They also rely mainly on technical analysis and indicators to time their positions.
However, there are some minor differences that we should focus on to make the distinction clearer. The main difference is that the intraday trading style might be much more frequent and has shorter open times for each trade. Alternatively, intraday trading might occur in shorter time frames, including seconds or minutes, to capitalize on rapid price changes. Furthermore, intraday traders specialize in buying and selling instruments that are available only within regular business hours.
The term “intraday trading” is also often used to refer to traders who aim to capitalize on the new highs and lows of any particular security throughout the day.
What you should know: Intraday trading is quite the same as day trading and was introduced as a term to define different pricing data tiers more precisely. However, there aren’t many fundamental differences in trading style and strategies, so whatever we have said about day trading has relevance here.
Types of Traders Based on the Tools They Use
After we have identified the different types of traders based on the time-frames they buy and sell in, it’s time to focus on the classification regarding the employed tools and methodologies.
If you have heard the debate of technical vs. fundamental analysis, you already have the answer to the two main types of traders. Think of fundamental and technical trading styles as two different schools of thought, both with their advocates and adversaries.
Fundamental and technical traders differ from each other based on the information they analyze and the factors they consider to shape their strategies. While the former relies on fundamental information like earnings reports, balance sheet analysis, analyst reviews, and more, the latter uses indicators and charts.
Fundamental and technical trading principles are often described as an opposition to each other. Still, many traders and investors prefer to rely on both to get a clearer understanding of the market and the potential of their target assets. The reason is that both methodologies pursue a common goal – in the case of stocks, for example, to find opportunities when the instruments are trading below their inherent value. Alternatively, to predict the potential growth and capitalize on it.
Fundamental traders evaluate assets by trying to give a realistic estimation of their intrinsic value. To do that, they study all types of information, including macro (global) and micro (industry) trends. However, they put the main emphasis on the individual performance and inherent characteristics of the asset.
In the case of stocks, for example, technical traders focus on measuring the financial strength and management of the individual company. To do that, they rely on financial statements, historical data, investor conference calls, press releases, analyst reports and estimates, and other sources of information to come up with crucial metrics for future performance. The more information a fundamental analyst covers, the more informed and precise its decision gets.
The end goal of fundamental analysts is to assign a value to the particular security in review, compared to its current market price. Based on that, the trader can decide whether to buy, sell, or avoid trading at all.
Most fundamental traders apply buy-and-hold strategies and usually open positions for the long term. The reason is that the fundamentals of a particular investment may not change for months or even years. That is why fundamental traders resemble investors more significantly than traders who buy and sell frequently. While they still rely on market news to complement their views (i.e., a press release announcing bad news could change the fundamentals instantly), in the general case, fundamental analysis loses its strength if applied on short-term horizons.
Fundamental trading appeals to many. However, this process we associate with information analysis and interpretation is time-consuming and research-intensive. It is more suitable for those opening long-term positions than traders willing to make money from the first moment.
Technical trading differs from the fundamental trading style because it aims to identify opportunities by using indicators to generate trading signals on a chart. As a result, other traders often refer to technical traders as “chartists,” since they spend most of the time looking for formations that indicate entry and exit points.
Technical traders are mostly short-term buyers and sellers. However, the tools technical analysis relies on also work on longer time frames and can be helpful when evaluating opportunities for buy-and-hold strategies.
Technical traders believe that all fundamentals are factored in the current price of the instrument. Instead of quantifying a security’s intrinsic value, they focus on using charts, visualizing patterns and trends, and indicating what the instrument is likely to do in the future.
We can make the point that, while fundamental traders rely on backward-looking information, the technicians try to “look into the future” and predict what the next market move is based on changes in the current and past volume, price, and other vital characteristics.
Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.”
In the general case, technical traders use data from short periods of time to develop the patterns used to predict securities or market movement. At the same time, fundamental analysis relies on information spanning years.
The main challenge of beginner technical traders is how to navigate the universe of available indicators and tools. Furthermore, there aren’t any clear “silver bullets” that you can learn and rely on solely. Just the opposite – most technical traders combine several indicators to get a confirmation for their trading signals.
While technical traders can be divided into several categories, there is one particular that we should focus on specifically. Price action trading is the most popular corner of the technical trading style. It specializes in plotting the price movement of a specific asset over a certain period. This technique forms the basis of all other technical analysis methodologies. Moreover, it works for all assets, including stocks, commodities, ETFs, derivatives, and more.
In a nutshell, price action traders ignore fundamental analysis metrics. Instead, they read the market and make subjective trading decisions based on the recent and actual price movements. Examples of traders that follow price action strategies include scalpers, arbitrageurs, and more.
Many short-term traders rely exclusively on price action and its signals to plan their trading decisions. They analyze the patterns in the up and down movements in the price of the security to try to predict where the market will move next. By looking for patterns and chart compositions and interpreting their signals, traders can plan for trend continuations, breakouts, or reversals.
Traders don’t generally see price action as a trading tool like an indicator. Instead, it’s the data source to build all other tools on. Some of the most notable examples for price action trading incorporate candlestick patterns. For example, the Harami cross, engulfing pattern, and three white soldiers into the strategy, just to name a few.
Deciding on a Trading Style
The first thing to do to decide on your trading style is to go through the basics and see which boxes you can tick. Here are a few things to ask yourself to help you lay the basics of your future decision:
Are you a beginner or already have some experience?
What instruments would you like to trade?
Are you able to stick to a plan and control your emotions?
How risk-averse are you?
Would you prefer chasing big one-off profits or building your wealth gradually?
How much capital do you plan to start with?
How closely will you monitor the market?
Do you have a specific goal, or you simply want to make money?
For example, if you are more conservative, more emotional, or with limited capital, becoming a scalper would be a recipe for disaster. On the other hand, if you are willing to take more risks and spend the time needed to monitor and analyze the market, day trading can be a great fit. On the other hand, if you have an investment goal (i.e., saving for retirement), then probably trading isn’t for you at all. It might be better to consider investing instead.
In theory, answering these questions will give you a solid basis to make a choice. But they aren’t everything. The best way to decide which trading style fits your skills and mindset best is by trying them by yourself. However, make sure to do that on the training ground without risking your capital. Trading different instruments through various strategies are challenging. It requires dedication and months or even years to master, which is why you shouldn’t rush.
In the end, there are many different scenarios and combinations. The best way to figure out what trading style fits you best is by recognizing your style and approach. That way, you will ensure the peace of mind and strength to stay consistent with the chosen path. In addition, you’ll be able to manage even in situations where market volatility makes you doubt your trading decisions.