Trades Union

Limassol Cyprus

Tel:+35725060055 E-mail: support(at)tradersunion.com

Find out what type of trader you are

January 2021

Share this:

Financial markets offer excellent earning opportunities but success largely depends on your personal abilities and the correct choice of strategy. By learning what type of trader you are from the start, you will substantially improve your chances of a stable profit.

He choice of your area of trading depends on many factors. Before reading this article, ask yourself several questions that will help you which type of trading is best suitable for you:

icon How much time can you dedicate to trading every day?

icon What is your emotional type?

icon Are you prone to take risks?

icon Have you noticed that you make rash decisions in a fit of passion?

icon Do you have the aptitude to study statistics and build mathematical models?

icon Do you have programming experience?

icon Are you inclined to make quick decisions or you prefer to carefully consider your every step?

These are the questions you need to answer before trying to understand trading . We will structure the information about different types of online trading and different types of traders in a way that will enable you to answer whether is suitable for you.

Key features of types of traders

Type of trader Time-frame Risk ratio Potential for profit Personal qualities Required skills
Fundamental Long-term Low Low Patience, consistence, prudence Fundamental analysis
News Short-term Medium Medium Discipline, composure, quick reaction Macroeconomic, behavioral finance
Scalper Short-term High High Discipline, composure, quick reaction Technical analysis, Volume analysis, Programming
Day trader & Swing trader Short-medium-term High/Medium High Discipline Technical analysis, Volume analysis
Arbitrage Trader - Low Low/Medium Logical thinking Statistics
Algorithmic Short-term Low Medium Logical thinking Statistics, Programming, Technical analysis, Economics

Fundamental Trader

  • Pros and Cons

    👍 Pros

    Comparatively low risks of losses
    Allows to combine trading and your day job
    The most psychologically comfortable strategy for traders
    Does not require in-depth knowledge of mathematics and programming

    👎 Cons

    Low profitability

Fundamental traders build their strategy of trading stocks studying financial indicators of companies. As a rule, they review quarterly financial statements and news releases to see the following:

icon Profit and earnings growth dynamics.

icon Debt burden.

icon Company’s value compared to its competitors in the industry.

icon Development of client base, etc.

icon

This type of online trading is perfectly combined with a day job in any area of business, as it does not require you to sit continuously in front of the screen and control your positions. As a rule an investor forms a portfolio of 10-50 stocks and adjusts the composition of the portfolio from time to time. The period of holding one type of stock in the portfolio may range from one quarter to many years.

This type of online trading is suitable for people who are not inclined to take risks, don’t like to change their decisions often and are not chasing excess profit.

Drawback the profitability of fundamental trading is comparatively low. Successful investors may expect the profitability of their portfolio to surpass the index, but not by much. , the trader will have to resign to the fact that stocks can behave unpredictably short-term.

Fundamental trading provides the best result after year and longer.

Example: A fundamental trader interest in the stocks of Company X. He has studied its quarterly reports for the period of the past several years. He learned that the company regularly pays dividends and that its earnings and profit are growing. , the Price to Earnings (p/e) ratio of the company is lower than average in the industry. The trader may assume that the company is undervalued and include it in his portfolio.

1

Trader

trader

2

Company X

  • Pays dividends
  • Price to Earning ratio lower of average
  • Earnings growth
  • Profit growth

3

Action

  • Buy
Reaction
  • Books to read about fundamental trading

    You can start with classic works on fundamental analysis:

    book

    The Intelligent Investor by Benjamin Graham

    book

    Common Stocks And Uncommon Profits by Philip A. Fisher

    Online resources you might find useful

    Earnings Calendar on Nasdaq website can help you monitor the releases of quarterly reports of companies.

    earnings calendar

    The screener on Finviz.com will help you choose the best company for investment through engagement of several dozens of built-in filters.

    finviz

News Trader

  • Pros and Cons

    👍 Pros

    Profit margin is higher than average
    Possibility of building strategies that are neutral to market
    Possibility of building a bot for trading based on the news

    👎 Cons

    Requires in-depth understanding of macroeconomics and market psychology
    It is difficult to compete with algorithms
icon

This type of trader follows the important economic news and makes decisions on entering a position based on th. The task of the trader is to quickly and accurately interpret the events and attempt to play on the market volatility that follows the release of the news.

As a rule, news traders do not try to cover the whole market instead focus on Forex, Stock or commodity markets.

For example, the important news on the Forex market include:

icon FED and other central banks interest rates announcements

icon Core price index (CPI)

icon Trade balance

Example: FED announces interest rate growth due to inflation. A downward gap can be expected in the EURUSD pair (dollar strengthening against euro), as the escalation of the rates in USD is a positive trend for dollar. If the news is a surprise for the market, the trader’s reaction should be opening a short position.

1

Trader

trader

2

News

  • FED announces interest rate hike
news

3

Reaction

  • Short of EURUSD
reaction
icon

The complexity of this trading type is that you must be able to interpret the news from economic and psychological standpoints. Often, the initial market reaction to the news contradicts economic logic. You need to have a good understanding of what the market expects and to extent the news is a surprise or disappointment for it. In recent years, it has become difficult for news traders to compete with trading robots that are programmed to make decisions within milliseconds. This is the reason why news trading is increasingly mixed with algorithmic trading.

He advantage of this type of online trading professional traders can achieve a higher profit margin than fundamental traders. For the most advanced news traders, the emergence of volatility is important, as they can use combinations of base assets and options in trading, allowing them to earn money on price fluctuations.

News trading should not be confused with news-based investment. Long-term investors also monitor the most important events, but their is not to profit from short-term volatility but rather more extensive analysis for entering long-term positions.

  • Books to read

    Macroeconomics and the notion of market volatility make up the foundation of the news analysis, which is why you need to study these topics first. For example, you read:

    book

    Concise Guide to Macroeconomics by David A. Moss

    book

    Trading Volatility: Trading Volatility, Correlation, Term Structure and Skew by Colin Bennett.

  • Online resources you might find useful

    Economic calendar is instrument of a novice news trader. It will help you review the schedule of news releases, forecasts of the economists and set filters for the desired markets.

    Many brokers offer an economic calendar on their websites. For example, on FxPro it looks like this:

    economic calendar

    Professionals work directly with the information sources.

Scalper

  • Pros and Cons

    👍 Pros

    Potential profitability margin is higher than average
    Earnings do not depend on market direction
    Possibility of building a bot for trading automation

    👎 Cons

    Stressful
    Requires knowledge of programming and mathematics for exclusion of the human factor
icon

Scalpers are the most active type of traders. Often, the scalpers perform up to several hundred transactions per day, trying to catch the slightest market volatility. The time of position holding ranges from several seconds to several minutes. Although this type of online trading holds a promise of good profits for professionals, it is considered the most stressful. Only the most liquid markets with narrow spreads, such as Forex pairs EURUSD and USDGBP, Apple (AAPL) and Bank of America (BAC) stocks are suitable for scalping. Many scalpers trade only during a small part of the day, for example, during the alignment of the British and North American trading sessions on Forex, when the liquidity is at its maximum.

The choice of the broker plays a decisive role for a scalper because in this trading type, the expenses on commissions are at their maximum and can ‘eat’ over half of the profit. Advanced brokers offer special conditions for scalpers, as they are the most active traders, maintaining liquidity in the market.

Some scalpers use minute and tick charts for trading and base their decisions on technical analysis. However, lately, scalping has been turning into a more automated process and the trader earns profit through a very small spread between the purchase and sale price of the asset.

  • Books to read

    book

    Forex Scalping Trading Strategies: How To Earn A Living Scalping Profits by Thomas Carter

    book

    Scalping Stocks and Futures: Making Money With: Top Strategies by Andrew C. Ellis

Day trader and Swing Trader

  • Pros and Cons

    👍 Pros

    Potential profitability margin is higher than average
    For beginners
    Possibility of building a trading bot without special programming skills

    👎 Cons

    Psychological risks
    Losses at the time of volatility
icon

As a rule, day traders and swing traders us technical analysis or volume analysis for trading. The difference between them is mainly in the timeframe and the period of position holding. Day traders trade by mainly using charts with a timeframe from 5M to 30M, trying to close all their positions by the day’s end. This trading type is suitable for more active traders prepared to dedicate a larger part of their day to trading.

Swing traders can hold positions from several days to several weeks, while their working timeframe on the chart is from 1H to 1D. This trading type is suitable for traders who prefer to be in the market for the majority of time, but not perform many transactions and not spend more than hours a day on trading.

Example: BTCUSD price is breaking the swingline, which is a good signal for many day traders and swing trader to open a short position.

swingline
  • Books to read

    book

    Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy

    book

    Getting Started in Technical Analysis by Jack D. Schwager

    book

    Reminiscences of a Stock Operator by by Edwin Lefèvre

    Online resources you might find useful

    tradingview

    Tradingview.com is the best resource for technical analysis

Arbitrage Trader

  • Pros and Cons

    👍 Pros

    With model
    Automation of decision making

    👎 Cons

    Requires in-depth understanding of mathematical statistics
    Competition with the top mathematicians and programmers of the world from large investment funds
icon

Arbitrage traders seek possibilities of risk-free earnings in the market through performance of several simultaneous buyandsell transactions in trading instruments with high correlation. Arbitra traders earn market inefficiencies.

Example: small price difference on stocks at different exchanges can serve as a simple cause for arbitra trading. If you sell stocks at one exchange at a higher price and buy them at another exchange at a slightly lower price, you can receive a risk-free profit.

1

Trader

  • Exchange A
  • Sell 10,000 shares at $10.23
  • Exchange B
  • Buy 10,000 shares at $10.21

Profite = Sell Price - Buy Price - Brokerage Fee

Also, common arbitrage models allow you to make money using divergences with highly correlated instruments:

icon Base assets and options on stocks.

icon Bonds with one credit rating.

icon Currencies of countries with similar structure economies, etc.

Lately, wide use of trading robots has practically eliminated options for simple arbitrage. This is why arbitrage trading requires in-depth understanding of statistics and wide application of automation. According to some estimates, over 50% of the trading volume in the global financial markets performed by robots using arbitrage strategies.

  • Books to read

    The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson.

    The Complete Arbitrage Deskbook by Stephane Reverre.

Algorithmic Trader

  • Pros and Cons

    👍 Pros

    Trading automation
    Exclusion of human errors
    Less stress and time

    👎 Cons

    It is difficult to compete with major investment companies
    The strategy must be regularly adjusted to the changes in the market
icon

Algorithmic traders earn their money by using a computer trading program, which fully or partially automates trades. This type of trading eliminate all drawbacks of trading, such as emotion-based decisions, stress, incorrect interpretation of data, continuously control your positions.

A bot will execute the exact orders it is to , which is why algorithmic traders can use all trading strategies we have described above.

Strategy is based on three pillars:

icon Criteria for entering a trade

icon Maximum allowable loss per trade

icon Criteria for exiting a trade

Understanding the work of technical analysis indicators is enough for creating the simplest bots. Using special trad software, you can automate and test your ideas even without in-depth knowledge of programming. R Trader platform from RoboForex offers this option.

start

The definitive drawback of simple bots is that you cannot set flexible and in-depth criteria. It is slightly more difficult to build a bot on the MetaTrader platform because you will need at least beginner-level programming skills for that. However, the depth of its settings is also much higher.

Trader-programmers build the most complex and efficient trading bots using the languages designed to process statistical information, such as Python and Java.

  • Books to read

    icon This depends on the strategy you want to base your bot on. Potentially, these are all the books we mentioned above.

    icon Also articles on specialized forums can be useful.

Expert opinion:

He began his career as a professional trader and worked as an analyst and trader at investment companies. He currently focuses on personal investments in the financial markets.

Based on my experience, I can tell you that online trading very often get mixed. The more knowledge and skills you gain, the easier it is for you to achieve success

Ten years ago, I began my career as a day trader, but now I prefer passive investment strategies based on fundamental analysis. This requires less time and effort, while the financial result is more stable.

I would advise new traders to study algorithmic trading and programming. Trading robots are not just a thing of the present; the future. Robots are already performing around 80% of all transactions in the financial markets and their share keeps growing.

Antony Robertson

Antony Robertson

trader-analyst of the Traders Union

Author:

Grant Adlington

Grant Adlington

Independent trader-analyst

In 2008, he graduated from the London Institute of Banking and Finance, Department of Finance, Investments, and Risk;

In 2009, he became the youngest trader-analyst at Global Invest;

In 2010, he became an independent analyst at TD Ameritrade;

In 2011, he defended his Ph.D. thesis on Economics at the University of California-Berkeley;

From 2012 to 2018, he worked in various American and International brokerage firms;

FAQ

What type of trader is the best for me?

Remember the questions we asked the beginning of this article? Read and answer them again, taking into account the knowledge you’ve gained. We are confident that after reading this article, you have a much better understanding of which online trading strategy fits you best.

Can trading be main source of income?

Trading can most certainly be an independent and lucrative profession. However, you do have to keep in mind the risks involve.

How much money do I need to start a trader’s career?

First, you need to test your abilities using a demo account for at least a month. It is recommended to start with a small amount that will not a huge hit on your budget. Many Forex brokers allow customers to start trading with $0, although practice shows that you need at least $200-500 to start with.