The Five Types of Traders on the Stock Market

For beginner traders out there,
perhaps the most important step to take to becoming better on the market, can
be done from within. You must clarify your goals, and truly understand why you are trading. This will make your
strategy much more focused and specific, and eventually make your trading
process much more optimized. Perhaps a concept worth studying for confused
beginners out there would be the various types of traders that exist.

As the title of this blog suggests,
there happen to be five distinctive
strategies which traders generally tend to follow in the market. While not
following a particular strategy by the book, traders tend to fall into one of
these broad categories when on the market, if not, they are some combination of
all the elements which we’ll discuss below. So without further ado, let’s break
down the most popular trading strategies and methods in the world today:

Scalp Trading

Scalping, also known as
micro-trading, is exactly what it sounds like. Your average scalper will not
hold onto any one share for any more than a few minutes, and this figure can
come down to as little as just a few seconds. The scalping strategy is
generally implemented by extremely hardcore and experienced traders, with the
knowledge and technical prowess to execute trades on such a frequent basis. The
primary outcome of this strategy is to make plenty of small profits in a day, which
will total to a sizable amount by the time the market closes. The general
mindset of scalpers out there is that it’s far easier to read small,
incremental changes in prices, rather than long, drawn out ones. However
enticing and rewarding scalping may seem, it’s not recommended for beginners,
as it’s a difficult and time consuming process with a very high failure rate if
not executed correctly.

Momentum Trading

Momentum trading is an opposite
pole completely, it focuses on capturing stocks which are already moving, and
capitalizing on the hopes that they continue to move in that direction,
essentially, following the ‘momentum’ of a stock. Generally, stocks which have
recently begun to rise are ones chosen by momentum traders, as should it rise
more, either steadily or sporadically, they can reap great benefits. The ‘rule
of thumb’ trade window for a momentum trader is anywhere between a few hours,
to a few days, traditionally, momentum traders tend not to focus on a particular
stock for over a week, as they will make their gains, move out, and begin to
target a new stock within this timeframe. Momentum trading is still not a
patient process however, as the trade windows are still fairly narrow compared
to some of the following tactics used by traders.

Technical Trading

A technical trader is exactly what
it sounds like, someone who analyzes trends, charts, statistics, and graphs
before, during, and after making a particular trade. A hallmark of those who
trade technically is someone with an extremely high level of knowledge in both
the disciplines of trading, and hard mathematics. What technical traders do
essentially is they invest great amounts of time into studying past trends,
current winners and losers, and the general market situation at the time to
make lucrative, mid to long term investments which are expected to increase
greatly over time. The thing about technical trading is that the skill floor
and skill ceiling can be as low or high respectively as you wish, depending on
things such as your time commitment, technical knowledge, and ability (or lack
thereof) to create comprehensive analysis regarding the market. Theoretically
speaking, and sometimes in practice, anyone can become a technical trader, it
all depends on how much time you’re willing to invest to learn the art of
trading and market motion.

Fundamental Trading

To the naked eye, fundamental
trading will, in essence, seem quite familiar to fundamental trading, however,
ironically enough, there are fundamental differences
between the pair of them. Fundamental trading is also a highly analytical and
studied discipline of trading, however, the primary difference between it and
the aforementioned technical trading, is that fundamental trading tends to look
at real life events, and changes, rather than analyzing purely mathematical
trends. For example, while a technical trader may look at the general one year
trend of a particular stock, project and predict an increase, and invest, the
fundamental trader will see upcoming events such as product launches, sales
closings, or acquisitions, and use their business knowledge to predict changes
in the price of a share. If this is proving complicated, here’s an example
you’re sure to understand; Apple hosts its World Wide Developers Conference
(WWDC) every year around the first week of June. In anticipation of this
conference, Apples share price always increases around this time, before
stabilizing after the conference has wrapped up. A fundamental trader would
therefore notice this trend caused by a real world event, and invest accordingly.
This type of trading is generally suited to those with great understanding of
the inner workings of business, and the ability to apply that knowledge to the
share market.

Position Trading

Finally, we come to the most common
form and tactic of trading for casual traders; position trading. These are
traders who look solely at the long term value of a particular investment. The
investments made by position traders are measured from months, to even years in
extreme cases. Unconcerned with short term fluctuations and shocks, position
traders research greatly before investing in a stock which they are convinced
will appreciate in the not-so-near future. This is one of the few trading tactics
which can be employed by those who do not trade full time, as this method of
trading is fairly hands off, and does not require constant or consistent time
investment.

Hopefully this article has given
you a bit more context as to how experienced players on the market tend to
trade. Now, keeping your goals in mind, you should see which strategy will work
about for you, or, develop some combination of the above tactics. Be sure to
experiment, mix, and match, as these strategies are by no means ‘one size fits
all’.