April 11, 2019

What Types of Traders Are There?

what type of trader are you?

The multifaceted world of financial markets offers numerous opportunities to make money by buying or selling financial assets online. Different traders use diverse strategies to pick out lucrative opportunities in the market. It is important to understand the various trading styles to determine which strategy is best suited for your trading goals.

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Here are the different types of traders that exist:

Noise Traders

Noise trading refers to a style of trading where decisions are made without advanced fundamental analysis of the underlying financial asset. It is a style of trading characterised by impulsive, irrational decisions, which are influenced by fear and greed.

Noise traders are generally considered risky traders as they tend to mimic the actions of other online traders, even when they are not necessarily right. A noise trader will trust other traders over the underlying fundamental factors of the asset they are trading. Noise traders also tend to be over traders, usually placing many trades relative to the profit that they bring in.

But while the above description seems to label noise traders as overall careless traders, they actually form the bulk of online financial traders, and they play a crucial role in the financial markets.

Their high volume of transactions boosts liquidity in the market, creating a solid stream of ready buyers and sellers. In the forex market, technical analysts may be considered noise traders, with many of their trading decisions made with complete disregard of underlying fundamental factors.

Noise trading is so prevalent that noise trading risk exists, which refers to the short-term price distortions or excesses of a particular financial asset.

Sentiment Traders

Every individual trader will always have an opinion of where they expect the market to move. This view will be expressed in the market in terms of the trade they will place. The movement of the market will be determined by the aggregate opinion of all participants.

This combined ‘mood’ or ‘feel’ of the market is what is referred to as sentiment or sentiment analysis. Thus, sentiment traders attempt to find and participate in market trends. They do not try to outguess or outsmart the market, they follow its cue.

Sentiment traders integrate different aspects of technical and fundamental strategies to identify and participate in market trends. There are mainly two types of sentiment traders: swing traders and contrarian traders.

Swing traders seek to trade momentous markets while avoiding passive markets, while contrarian traders venture to pick out reversals in the market or anticipate changes in overall market sentiment.

Practically, sentiment trading requires in-depth research and analysis to accurately predict market ‘mood’. The risk for sentiment traders is that sentiment can change in an instant, and it is also hard to determine optimal price targets. But sentiment traders often find success when trading assets that are difficult to value, such as cryptocurrencies or forex CFDs.

Market Timers

Market timing is a trading strategy that involves buying or selling based on predictive methods, such as technical analysis or economic data that seek to forecast the future price movement of the underlying asset. Market timers attempt to predict the future price direction of a particular financial asset then move in to buy and sell accordingly.

Critics of this strategy have always pointed out that it is impossible to time the market and have equated market timing to gambling or outright guesswork. But short-term trading strategies have been successful for various online traders who seek to time the market.

Market timing is therefore suitable for scalpers or day traders who seek to enter numerous trades within any trading session for little profits that eventually add up.

The major downside of this strategy is the amount of time a trader needs to stay glued to their charts so as not to miss trading opportunities, as well as the transaction costs that accrue from placing plenty of trades.

Fundamental Traders

Fundamental traders hold the belief that the market will react to particular events in predictable ways. It is, therefore, possible to make informed decisions in the market by understanding economic events and the expected reactions.

Fundamental traders will make a point to gather all financial and economic data related to the underlying asset and process it accordingly, in the context of the prevailing price.

Fundamental trading can be viewed from the short-term perspective as well as the long term. Most fundamental traders, though, tend to focus on the long-term approach, a strategy that is more akin to traditional investing rather than online trading. Still, in contemporary trading, such as the forex market, traders can still apply fundamental trading strategies, such as trading economic news releases.

Due to its emphasis on logic and facts, fundamental trading appeals to many investors and online traders, but who is to say that the financial markets will not be illogical and defy hard data more often than expected?

Final Word

The financial markets are a sea of opportunities. It is important to understand the different types of trading strategies and apply one that suits your personality type, risk appetite and will help you to attain your trading objectives.

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