To an outsider, markets have mainly 2 types of participants – Investors and traders. But within each type, are sub-types that aren’t all the same. We have already written about the different types of investors here. In this article, we’ll be writing about the different types of traders in the stock market.
While everyone participates in the market to make money, their approaches are what make them different from each other. All the different types of traders have different trading styles and strategies. If you’re looking to become a trader, then you might want to know exactly what types of traders there are in the market.
Different Types Of Traders
Discover the Different Types Of Traders in the stock market by continuing to read.
1. Day Traders
A day trader is an individual who buys and sells securities within the same day. They are also known as intraday traders. The markets see volatility on a daily basis, and day traders try to take advantage of the short price movement. Such traders usually take multiple trades in a day using technical analysis.
2. Swing Traders
A swing trader’s approach is to make both short and medium-term gains in the markets. They use both technical analysis and fundamental analysis. This form of trading involves holding a stock for anywhere from a few days to weeks.
They need technical analysis to identify potential trading opportunities and fundamental criteria such as quarterly reports and corporate actions. These types of traders hold for longer than a day and carry a moderate level of risk.
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3. Fundamental Traders
The term “fundamental” is more associated with investing than trading. But some traders use it to make gains as well. A fundamental trader uses corporate events and actions to pick stocks to buy. This strategy is more relevant to investors than traders.
4. Technical Traders
Technical traders use various indicators, candlesticks, and chart patterns to trade. This includes using historical data and price movements of the security. The movements of the security are used to decide when to buy or sell.
5. Arbitrage Traders
Arbitrage is a simple, yet effective form of trading. It involves trading the same/similar security across different markets. The benefit here is to take advantage of the slight price difference in the security, listed on multiple markets. SEBI doesn’t allow arbitrage trading in India on NSE and BSE, but it is followed internationally.
6. Sentiment Trader
By sentiment, we mean the market trends. Sentiment traders identify trends in the market and act accordingly. The approach is to find securities that move with the market momentum. Here, both fundamental and technical analysis is applied to find the right market movement. Swing trading is one type of sentimental trading.
7. Contrarian Traders
Trading requires a quick and accurate analysis of the market movement. Based on the sentiment of the market, traders make a move. Contrarian traders, as the name suggests, are those individuals who use indicators to learn the market movement, and act in the opposite direction. For example – When there is a lot of selling of a stock by its investors, they use it as an opportunity to buy the stock.
8. Noise Traders
In an economy, there are a lot of events and macroeconomic movements that occur occasionally. The most recent example of this is the budget, which directly and indirectly affects many of the companies listed on the stock markets.
In confusion, there is a lot of volatility in the stock market. Noise traders ignore fundamental data and use the noise in the market from big economic trends.
9. Position Trader
Position traders hold securities for a long period of time, anywhere between several weeks to several months, with the goal of capturing long-term price movements. They consider technical analysis, and fundamental factors as well as macroeconomic trends and market sentiments.
These types of traders need to have a higher risk tolerance, patience, and of course, experience. This is because the holding period is much longer than other trading strategies, which means more volatility.
10. Algorithmic Trader
Algorithmic Trading or algo trading is the use of computer programs to execute trades. Algorithms refer to the use of pre-defined strategies that are set in place by the trader. Here, algo traders try to capture the short-term price movements, which are otherwise difficult to capture on traditional trading techniques.
There is a lot of computation using large data sets involved in algorithmic trading. It requires an advanced level of technical knowledge, market experience, and some coding knowledge to design custom algorithms.
Necessary Skills For Traders
Now that we’ve covered some of the different types of traders, here are some of the important and necessary skills needed to become a trader.
- Research & Analysis
- Patience & Discipline
- Technical Skills
- Record Keeping
- Self Control
Now that you have read about the different types of traders, you might have found one or two of them interesting. Irrespective of which type of trader you want to be, you need to have the necessary knowledge and skills to get started.
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