Stock traders fall into a few different categories which we will explore today. They are generally all-short term, whereas stock investors are longer-term.
You may be aware that the stock market provides an opportunity to make money, but you are unsure how traders decide when to buy and sell.
You might have also heard of terms like “swing traders” or “scalp traders”, which are different stock trader types, and want to learn more about them.
Either way, you’ve come to the right place.
As a trader, the trading strategies you adopt will determine the type of trader that you are.
Once you’ve chosen a trading strategy, you should study it very well to see how profitable and applicable it can be.
Understanding how different traders make decisions will help you establish yourself as you venture into the stock market.
It’ll also help you understand how the market moves and fluctuates.
Both stock traders and stock investors are necessary for the market to function correctly.
Trading and investing are two usually interchangeable words, but in the context of the stock market, they are entirely different activities.
Although stock traders and stock investors are both part of the market, they perform different functions, as discussed below.
The dictionary defines a stock trader as buying and selling stocks / shares.
A stock trader is actively involved in the activities of the stock market.
They buy shares in a company and focus on the market rather than how they operate or on any of its fundamentals.
A stock trader’s goal is to take advantage of short-term price volatility and make a profit.
However, the trades may last from a few seconds to several weeks or even years.
Stock traders are professionals in what they do.
Luckily, anyone can be a full-time or part-time stock trader/investor.
Stock or share trader types are primarily concerned with:
- Demand and supply – Stock traders, closely monitor their intraday trades to determine the direction in which the money is moving and why it moves in that particular direction.
- Client services – Stock traders can also be hired by clients to provide liquidity through rapid trading.
- Price patterns – Stock traders use technical analysis to determine when to buy and sell their stocks. Technical analysis has to do with using history to predict future price movements.
- Market emotion – Stock traders are significant risk-takers. They sometimes play on the investors’ fears through strategies like fading.
A stock investor can be an individual or a company that purchases stocks and intends to hold the stock for an extended period.
The stock investor can hold onto their stock for months or years.
The investment decisions are mainly based on fundamental analysis, and they generally consider their investment as a part ownership of the company.
Most stock investors believe in the buy and hold strategy, which implies buying stock ownership in a company and keeping them for an extended time.
They think that the company has excellent prospects, and as such, they concern themselves with two things: value and success.
A stock investor must pay attention to the value that the company’s shares represent.
They must also determine the company’s future success by looking at their financial strength and future cash flows.
The shares’ value and success must be determined through a thorough examination of the company’s financial statements and other trends that may predict its future growth.
Buy and Hold Traders
Buy and Hold Traders or long-term traders are traders who buy and hold stocks for an extended period.
Quite possibly, this group of traders represents the largest group of people to trade stocks because they spend only a little time monitoring the stock market.
The buy and hold traders apply an already predetermined criterion to decide the number of stocks to purchase.
They keep the stock for an extended period, possibly months and sometimes years.
They are optimistic traders who may sometimes keep their stock during a down point in the stock market, hoping that the stock will rise once the downtrend ends.
Swing traders hold trades for a more extended period than day traders.
They continuously monitor the stock for weeks or even months before trading.
When buying stocks, they put the stock market’s momentum into consideration.
In light of this, swing traders buy stocks that fit their stock selection criterion when the market moves in the upside direction.
The stock is then sold when the swing has stopped or is close to their calculated top swing.
Without careful monitoring of technical and fundamental analysis, this type of trading may not be productive.
Swing traders mainly focus their attention on specific industries or businesses to become expert traders in the movement of the stocks of that industry or business.
Depending on the stock market’s momentum, a swing trader can hold stocks for days, weeks, or even months.
They spend most of their time studying company industry forecasts and their financial reports.
Swing trading may not necessarily require that the traders monitor the stock market, but monitoring the market momentum is a priority.
Researching, studying financial records, and monitoring the markets is time-consuming and stressful.
Swing trading is very volatile; hence swing traders require more capital than day traders to help them withstand market volatility.
Swing traders must have enough capital to help them not hit a margin call.
With a more extended time frame of open trades, swing trading’s potential earnings are relatively more prominent, with several pips per trade between the opening and closing positions.
Swing traders can also take advantage of medium-term trends in the marketplace.
Day traders are people who take their trades one day at a time.
They are investors who buy and sell stock on the same day.
Sometimes, they operate within a concise trade window, which can be so short that it doesn’t exceed 20 minutes.
Day traders are a little less concerned with long-term trades, but instead, their concern is more about the immediate trends than long-term bias.
They hold on to stocks for only a few minutes and can buy and sell the same stock over and over throughout the day.
A day trader tends to sell all his stocks before the market closes for the day.
They do this in order to avoid overnight gaps, a situation in which a particular stock may open at a significantly different price than the previous day.
Most day traders do this for a living as day trading requires spending a significant amount of time daily trading.
A day trader must eliminate emotions from trading and apply market analysis instead.
One of the reasons why day traders trade the way they do is that they do not have enough capital to absorb early losses.
Day trading does not require as much capital as other trading strategies do.
Since the trading period is not long, the potential profit is also small compared to long-term trading.
Day traders only benefit from the volume of trades they do daily as profit.
Most times, it is below 100 pips per trade.
Intra-day trading describes securities that trade on the markets only within regular business hours.
The traded securities include exchange-traded funds and stocks.
An intra-day stock trader trades in a position in a security within the same day.
Intra-day traders and day traders rank the same on the risk spectrum.
The market condition they operate in is a rapidly changing one, and they are always on the lookout for quickly developing profit opportunities.
Most intra-day traders employ technical analysis to decide when the condition is suitable for either a short-term or long-term trade and then exit, hopefully with a profit.
Although the risk associated with intraday trading is high, so is the possible return on investment (ROI).
Scalp trading involves an even shorter trading time than day trading. It is considered the short-term form of day trading.
Scalp traders are considered the ultimate short-term traders because they operate an even shorter time frame than day traders.
They spend a lot of time glued to their chosen markets, making them one of the most dedicated traders.
Scalp traders do not require a large amount of capital to start trading.
However, they need a constant flow of money to allow them to take advantage of any opportunities that may come up in the stock market.
Like day traders, scalp traders rely on the aggregate profit from several small trades rather than rely on large trades’ profits.
The profit accumulates over time to a substantial amount.
Theses days, computer algorithms facilitate the majority of scalp trading.
Price Action Traders
Sometimes, when it comes to trading, keeping things simple can be an effective strategy. Price action traders rely heavily on technical analysis rather than conventional indicators to help them make an accurate deduction on a trade direction.
They use a combination of chart patterns, volume, price movement, and other crude market data to determine when to take a trade.
Although this trading method is considered minimal and straightforward, it is by no means easier than other trading strategies.
A price action trader must have a solid understanding of how the market works and all the relevant core market principles.
One of the benefits of the price action trading methodology is that it can work in any market, from stocks, gold, foreign exchange, oil, futures, etc.
Generally, technical traders are stock traders who use charts to trade. They rely majorly on moving averages, momentum, patterns, etc.
They have a general belief that all asset movement is based on offer and demand before anything else. In other words, they do not monitor the stock or commodity they’re trading; their decision to buy or sell is mainly dependent on the trading data.
In fundamental trading, the trader focuses on events specific to a company before deciding the stocks to buy and when to buy them.
In other words, they predict the movement of the stock analysis by monitoring how the company is doing.
A fundamental trader’s end goal is to examine as many companies as possible to find those that are most undervalued.
To achieve this, the traders take their time and sometimes spend days carefully researching the company, a specific sector, or the economy as a whole.
Their focus is majorly on financial results, SEC filings, etc.
Fundamental trading can be both long-term and short-term.
However, fundamental analysis deals more with buy-and-hold investment strategy than short-term trading.
Fundamental analysis loses its strength in the short term.
Some trading strategies require the trader to make split seconds decisions, while at other times, the decisions are based on trends and factors that play in a particular day.
Fundamental trading is based on logic and facts, making it appealing to many investors.
Most times, the interpretation of these facts and unearthing the logic is research-intensive and time-consuming.
Fundamental traders sometimes decide to combine fundamental trading with other trading strategies like trend trading or breakout trading.
Before they can make any good of this, they spend days figuring out why a company’s stock has remained unyielding.
Hedgers are stock traders who are constantly conscious of the risk involved in price movements and wish to protect themselves.
They shift the risk to whoever is willing to bear it.
Hedgers are so keen to protect themselves from price movements that they are even willing to pay a predetermined cost to achieve this.
They are one of the four types of futures traders.
Others are speculators, arbitrageurs, and spreaders.
An option trader is a trader that buys and sells options.
Instead of trading stocks, an option trader trades the stocks’ options.
Options trading involves the trading of stock options over an exchange.
Because options trading is mainly conducted online through option trading brokers, it is often referred to as online options trading.
It is also worthy of note that options trading completely differs from future trading.
Options and futures are entirely different derivative instruments, with each having its unique characteristics.
When it comes to handling your investment portfolio, the stock trader type you are will dictate your choices and strategies.
Some people trade to reach their financial targets.
Others also buy, hold and wait until time passes and the prices of assets increase.
Whichever stock trader types you lean towards, recognizing your style and approach will help give you the peace of mind and strength to stay consistent with your chosen path when market volatility leads investors to doubt their investment decisions.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.