Different Trader Types

Different Trader Types

There are a handful of trader types in the markets. Determining the type of trader you are takes into account few critical variables. Time horizon, strategy, & goals can all be differentiators for trader types. No matter which trader type you are, all styles will inherently being bullish or bearish in nature. This can also be considered long or short biased on a trade. Each trader type will take into account all of these variables to truly form the unique trader style that is themselves.

The 4 most popular and common trader types are…

  • Day Trader/Scalper
  • Swing Trader
  • Investor

Here are some other ways to think about different trading types in the markets. You can begin to see how different trading styles can overlap other trading strategies. The best traders will adapt and find out what works best for them. When learning how to become a successful trader you definitely want to find a plan that works (for you) and stick to it!

What is a Day Trader?

A day trader is a popular type of trader that is much more active than a swing trader or investor. The goal of a day trader is to capitalize on very short term momentum. A day trader will open and close positions in one trading session, never holding a position overnight. Of course they can hold trades overnight, but day trading specifically is a strategy that isn’t based on holding trades overnight.

This type of trading has become more popular than ever as a result of the COVID-19 pandemic of 2020 bringing a ton of new entrants into the market to try their luck. Day trading can be done with minimal tools & resources, but it is not recommended. This type of trading has become one of the most difficult forms of trading. Without the proper tools, understanding and knowledge, 90% of those who try day trading, will fail.

Day trading is not for everyone. This type of trading brings a substantial degree of attributes into play. While there is day traders who might trade high momentum stocks with volatility and range, there are day traders who take a more relaxed approach, similar to swing trading. Identifying key levels of support, resistance, consolidation are some of the easiest ways to determine entry & exit points in trades. 

A more risky approach to day trading could be trading high relative volume stocks that have had breaking news or press releases that have greatly increased or decreased the price of the stock. For those with a higher risk appetite, or less risk averse, these stocks can provide lucrative opportunities for gains. The same principles apply for determining key levels for trading these stocks.

It’s important to note, when trading anything in any time frame, there should always be a trading plan. A trading plan should at least involve where you plan to enter/scale into a trade and where you plan to sell/scale out. Or at least know what you are looking for when entering the day trade, for example a scalp of the price action. This could be capitalizing on a quick spike in price based on a breakout or technical set up, or simply high volume coming in. We cover more detail of this in the Sizing & Trading Plan blogs.

Day trading does not leave you susceptible to overnight risk. Because a day trader closes all their positions before the market closes, they never have to worry about any risks associated with non market hours sentiment change in the stock or overall market.

These gains would typically be taxed as short term capital games because they were held for less than a year.

Scalp Trading

Some day traders are considered to be scalpers. Do you know what Scalp Trading refers to:question: If not, give this image a look :eyes: – It is a :four: part breakdown on the basics of scalping for a quick understanding. Scalping is very fast-paced! ⚡️ If you’re a really good video gamer, :joystick: have a grasp on trading and finance, are a quick decision maker and keep a level head – scalping might be a great strategy for you❗️

What is a Swing Trader?

A swing trader is a very common type of short to medium-term trader. This is where a trader attempts to capitalize on a short to medium-term gain. A short to medium-term time frame can be anywhere from 1 day (overnight) to several weeks or months.

This type of trading has become very popular with the evolution of smart phones and stock trading apps. Specifically apps like Robinhood have revolutionized the way traders interact with the market. The barrier to entry for buying and selling stocks has never been lower. Swing trading specifically, allows for you to trade away from a computer, and free of any special requirements to execute trades. You are able to enter and exit positions at pre-determined prices by setting orders in advance to market hours.

The essence of swing trading is capitalizing on a few key catalysts. Some of the most popular forms of swing trading are by technical analysis. Analyzing a chart for specific patterns, setups, or indications can help a trader choose entry & exit points on a trade. Other popular catalysts are trading momentum run up into events. This can be anything from earnings, to investor conferences, even interviews.

Swing trading will leave you susceptible to overnight risk. This means, your position can be affected by overnight sentiment changes. This is where you would not be able to sell any of your position because the market and exchanges are closed.

These gains would typically be taxed as short term capital games because they were held for less than a year.

Swing trading in the most basic form. Identify the trend, buy the dip, and let it ride. This graphic instills a simple idea, that can work out well for swing traders. One should always have a plan and a goal for the trade – and one must stick to that plan! :boom:

Basic Swing Trading

What is an Investor?

Broadly speaking, an investor can mean many things. But one thing Investors have in common is, they are putting money into financial instruments, real-estate, other assets, etc. with the expectation of gaining a return on those assets at some point in the future. An investor for the purpose of this blog is, someone who puts money into financial assets such as stocks or options.

An investor in terms of trader types is a very long-term, big picture type trader. Investors are choosing stocks to put in their portfolio with a very long-term outlook. This is typically at least over 1-year in time to realize their gains. Most investments are made with much more than a 1-year time horizon, as some investments could be intended to be held for ever.

Investors may trade around a core long term position to take advantage of price fluctuations over time. This can be labeled as position trading. But, ultimately, it can still be a long term investment.

Most people opt to invest through multiple avenues. One common way is through the use of a 401k or IRA (Individual Retirement Account). This is using the accumulation of time to take advantage of growth of specific financial assets. Typically investing is less risky since the time horizon is so long. Over time the markets tend to go up.

It’s also important to note that positions sold after at least 1 year of holding are subject to long-term capital gains tax rates, vs. positions sold under 1 year are subject to short-term capital gains taxes. These rates can make quite the difference if the position is sizable. We are not financial advisors nor tax professionals. Please contact your personal financial and tax advisors to completely understand the extent of taxes you may be liable for as a trader. It is always best to stay on top of these aspects of your financial situation.

Investors get to also take advantage of dividends & compounding growth.

Bulls vs Bears!

Bulls vs. Bears No matter what trader type you are, there are always going to be bulls and bears. Bulls Vs. Bears… It’s a simple concept! Both a bullish and bearish outlook can be very profitable. :water_buffalo::bear: Long & Short positions basic definition :green_circle::red_circle: This may seem obvious to most/all active traders, however, there was a time in life where the best traders had to learn these terms:bangbang: Bulls = Long || Bears = Short

Trading Style and Time Frame

The markets exist in multiple time frames simultaneously :stopwatch::arrows_counterclockwise::clock: Understanding which time frames to trade on is important for identifying primary trends and executing refined entries and exits in a shorter time frame period❗️This will will depend and vary based on the different trading strategies. Here’s a reference for what time frames to :eyes: look at for different trading types and also how Day Traders view intra-day trading…

This has been a simple breakdown of trader types, and how traders in the market can identify themselves. To learn more about trader types and ask questions, check out our Trading Room Trial! The more you learn, the more you earn! If you have any questions or comments about trader types, feel free to use the contact form below to get in touch with us.