What Type of Trader Are You?

You identify that the stock market provides an opportunity to make money, but you aren’t quite sure how investors know when to buy and inform against. Or maybe you’ve heard terms like “noise trader” or “arbitrage trader,” and you want to know more about them. Either way, an overview of some of the myriad common types of trading strategies will provide insight into the trading terminology and strategies used by discrete investors attempting to build wealth in the markets.

Understanding these strategies can help you find one that best mates your personality.

Fundamental trading is a method by which a trader focuses on company-specific effect come what mays to determine which stock to buy and when to buy it. To put this in perspective, consider a hypothetical trip to a shopping mall. In the mall, a crucial analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not.

While barter on fundamentals can be viewed from both short-term and long-term perspectives, fundamental analysis is often more closely associated with the buy-and-hold scenario of investing than it is with short-term trading. With that noted, the definition of “short term” is an important regard.

Some trading strategies are based on split-second decisions and others that are based on trends or factors that leeway out over the course of a day, the fundamentals may not change for months or even years. At the shorter end of the spectrum, for example, the release of a firm’s trimonthly financial statements can provide insight into whether or not the firm is improving its financial health or position in the marketplace. Varies (or lack of changes) can serve as signals to trade. Of course, a press release announcing bad news could change the centrals in an instant.

Fundamental trading has a real appeal to many investors because it is based on logic and facts. Of course, unearthing and elucidating those facts is a time consuming, research-intensive effort. Another challenge comes in the form of the financial markets themselves, which do not continually behave in logical ways (especially in the short term) despite reams of data suggesting that they should.

Noise trading refers to a style of investing in which decisions to buy and sell are made without the use of fundamental facts specific to the company that issued the securities that are being bought or sold. Noise traders generally create short-term trades to profit from various economic trends.

While technical analysis of statistics generated by demand activity, such as past prices and volume, provides some insight into patterns that can suggest following market activity and direction, noise traders often have poor timing and over-react to both good and bad message.

Even though that description may not sound very flattering, in reality, most people are considered to be noise merchants, as very few make investment decisions solely using fundamental analysis. To put this style in perspective, let’s revisit our at the cracker analogy about a trip to the mall. Unlike the fundamental analyst, a technical analyst would sit on a bench in the mall and protect people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst’s decision would be meant on the patterns or activity of people going into each store.

Technical analysis, like other strategies that include data analysis, can be time-consuming and may require quick reactions to take advantage of perceived opportunities.

Emotion traders seek to identify and participate in trends. They do not attempt to outguess the market by finding great securities. In preference to, they attempt to identify securities that are moving with the momentum of the market.

Sentiment traders combine miens of both fundamental and technical analysis in an effort to identify and participate in market movements. There are a variety of sentiment sell approaches, including swing traders that seek to catch momentous price movements while avoiding listless times and contrarian traders that try to use indicators of excessive positive or negative sentiment as indications of a potential reversal in thought.

Trading costs, market volatility, and difficulty in accurately predicting market sentiment are some of the key challenges facing sentimentalism view traders. While professional traders have more experience, leverage, information, and lower commissions, their profession strategies are restricted by the specific securities they are trading. For this reason, large financial institutions and professional businessmen may choose to trade currencies or other financial instruments rather than stocks.

Success as a sentiment trader over again requires early mornings studying trends and identifying potential securities for purchase or sale. Analysis of this disposition can be time-consuming, and trading strategies may require quick timing.

Market timers try to guess which guidance (up or down) security will move to profit from that movement. They generally look to technical subpoenas or economic data to predict the direction of the movement. Some investors, especially academics, do not believe that it is possible to forebode the direction of market movements accurately. Others, particularly those engaged in short-term trading, take the exact diverse stance.

The long-term track record of market timers suggests that achieving success is a challenge. Most investors resolution find that they are not able to dedicate enough time to this endeavor to achieve a reliable level of celebrity. For these investors, long-term strategies are often more satisfying and lucrative.

Of course, day traders would argue that furnish timing could be a profitable strategy, such as when trading technology shares in a bull market. Investors who grasped and flipped real estate during a market boom would also argue that market timing could be remunerative. Just keep in mind that it’s not always easy to tell when to get out of the market, as investors that got burned in the tech-wreck smash and real estate bust can attest. While short-term profits are certainly possible, over the long term, there is slight evidence to suggest that this strategy has merit.

Arbitrage traders simultaneously purchase and sell assets in an effort to profit from price alterations of identical or similar financial instruments, on different markets or in different forms.

The Bottom Line