If you're considering getting into trading on the stock market, it's important to know the different types of traders, the advantages and disadvantages of different trading strategies, and how much technical analysis you'll need for each type.
Don't worry too much, it's not too hard to learn the basics about each different type of traders and trading strategy.
You'll probably be able to learn what you need to get started pretty quickly, and you'll be able to learn a lot more once you've started trading regularly.
Let's take a close look at the types of trading and traders.
5 Different Types Of Traders
There are a lot of different kinds of traders, from day traders to swing traders and forex traders. All of these trading styles have their own strengths and weaknesses and are suited to different kinds of people and skillsets.
Here are 5 of the most common types of traders, what they do, and how it works.
Day traders are defined by the timeframe of their trades. A typical day trader will close all of their open positions before the end of the market day to avoid intraday trading.
This trading style takes a lot of technical analysis since you'll need to make trades fairly quickly, and you'll need to have a good fundamental analysis of the markets and which trades are most advantageous.
You can be a forex trader as a day trader as long as you close your positions within the trading day it doesn't really matter what you're trading in. However, most traders buy and sell the same kinds of stocks or commodities most of the time.
Limiting what you trade in, especially at first, is a good idea to help you build expertise and skill for the kinds of trading you're going to be doing.
Having expertise is important because you need to be able to make same-day trades with confidence.
Day traders take advantage of price movements during regular business hours but don't have to worry about market volatility overnight since their position is secure before the end of the day.
However, day traders are focused on short-term trading and looking for price movement and same-day trends more than long-term market movement. That means that day trading is active trading and an average day trader needs to be able to watch the markets fairly closely.
It also means that day trading takes a lot of skill to get right. Small mistakes while day trading can reduce your daily profits and make it harder to succeed.
Related: How to Make a Living Trading Stocks
Day Trading Advantages
Day traders have a huge advantage since they don't have to worry about negative market news affecting their portfolios after the markets close.
Financial markets can be incredibly volatile overnight, so focusing on the trading day gives you a little more stability.
Day traders can be forex traders, technical traders and can use a wide variety of other trading strategies, but they tend to make trading decisions quickly.
Day traders can also avoid some risk by closing trades within a couple of hours of making them, which helps minimize price changes.
Swing traders are a little different from day traders. Day traders look for relatively short-term gains and reduce risk by closing orders before the end of the market day, which is why it's called day trading. Day trading loses some opportunities though, that a swing trader can take advantage of.
That's because swing traders hold their positions open for longer, usually a couple of days or even several weeks, to take advantage of price trends. This isn't the same as long-term traders who are looking for even longer trend trading, but it lets you take advantage of different trading opportunities.
A good swing trader focuses on trades that will work to their advantage over the medium term. Days is ideal, but swing trading can often involve momentum trading and the core of momentum trading is getting in, and out, at the right time.
Swing traders can use a wide variety of trading systems and may have several swing trades open at any time. Like other kinds of intraday traders though, swing traders can be vulnerable to late-night market news that can reduce their potential profit.
This short-term form of trading still requires a lot of skill and the ability to identify trading opportunities and strong technical analysis.
Swing trading can be more forgiving since you can keep the order open to recover from short-term losses after the trading day.
Swing trading is also considered a good option for beginners because intraday trading takes less time.
Related: How to Double your Money in a Day
Swing Trading Advantages
Intraday trading still uses market volatility to its advantage, but it's a trading style that's a little easier for beginners and gives you a little more leeway to recover from mistakes before closing an order.
Of all the types of trading swing trading can take some of the least time per day since you aren't taking the same kinds of risks as a day trader or scalp trader, but you also don't have to do the technical analysis of a position trader.
Since swing trading is a trading style, you can be a forex trader or specialize in almost any kind of trades.
This kind of trading is about identifying opportunities to capture gains in the short term.
You're able to prioritize one good trade over many fast trades, which also makes swing trading less time-consuming for many traders.
Position traders are different from the two types of trading we've already discussed. A position trader isn't looking at short-term trading, instead, position trading looks for long-term positions and the macro trends of the market.
They aren't looking to take advantage of small price movements. Instead, position traders want growth over an extended time frame and make investment decisions based on their analysis of a stock's potential value in the market.
That means that short-term volatility and slight losses may not influence a position trader's opinion of a trade.
This kind of trader needs a strong understanding of macro trends in the market. They do a fundamental analysis of a company's value, trends in its niche, and other factors that may influence its value in the long term.
Most position trading is extended period trading as the traders try to keep their stocks until they are at the maximum possible value.
Even more, than swing trading, position trading is about getting good long-term trades on the stock market, not short-term.
Position traders are also thinking about the intrinsic value of every trade.
Macro trends might be very good for a certain company, but if their stock doesn't have much intrinsic value traders might skip it in favor of a more valuable option.
Some position traders look for breakout trading opportunities where a specific stock goes above its normal value as a way to make a bigger single-trade profit.
These traders also benefit from the action of the national futures association and the commodity futures trading commission since they help prevent swings in the market from defying long term trends and norms.
Advantages To Position Trading
This type of trading lets you buy and sell at a slower pace, which can mean it takes less time day to day.
But, it's easy to start trading with only one or two trades with this style, which makes it a reasonable option to take minimal risk while you learn about the market and long-term trends.
Scalp traders are a little like price action traders, they move quickly in order to get the maximum profit from reselling a stock almost immediately after buying.
This is different from technical traders since technical traders focus on the technical details of a stock rather than the price changes, though scalp traders may trade in the same stock as any other style. Like a price action trader, a scalp trader is looking for profits and may place trades in as little as a few seconds.
Of all trading types, scalp traders are one of the most aggressive, but they can also make some of the most profit day to day.
Many investors avoid this trading style though because it's easy to have losses instead of profits if you misjudge the momentary trends in the market.
Advantages To Scalp Trading
Scalp trading can be one of the fastest-paced and most competitive kinds of trading, but it doesn't require as much in-depth knowledge of different companies and opportunities.
It's more about seizing the opportunities of the moment instead of technical analysis.
That means that you're looking at each trade based on what the prices are doing and likely do to in the next few minutes rather than the value of the company or the long-term prospects of the trade.
However, for all its advantages, these traders need a lot of dedication since they will typically spend hours doing nothing but watching the markets and making very fast trades.
Fundamental traders are different again since fundamental trading focuses more on the value of a company or asset, rather than trading swing prices and short-term fluctuations.
They also pay less attention to market trends, trusting that the value of the company will bear out in the long-run.
Fundamental trading is similar to position trading, but position trading is more influenced by market trends in their trading decisions.
This can be one of the more effective trading styles if you have the patience for it, but it also leaves the trader vulnerable to fundamental analysis loses.
If you overvalue a particular company you may end up losing profits when the market never reaches your anticipated value.
To get a good analysis of companies this kind of trader relies on financial reports, press releases, investor conference calls, and other kinds of historical data, which also means a lot of research into company registered data.
Advantages To Fundamental Trading
Fundamental trading is very different from day trading and requires a different trading style since it needs more research and slower buying and selling.
This is a good style of trading for traders that want to do long-term analysis. It's also good for people who want a larger profit per trade than day traders or scalp trading.
Other Kinds of Trading
Of course, the 5 we've already covered aren't the only kinds of traders out there, here are a few more less common types.
This kind of trading relies on using analytical algorithms to find the most mathematically advantageous trades.
Event-Driven trading focuses on the combination of analysis and the impact of real-world events to plan for and take advantage of opportunities.
Online Options Trading
This kind of trading is typically done through an online broker and involves trading stock options on an exchange.
When you're thinking about the kinds of trading you should also think about what's being traded in addition to the timeframe and how trading analysis happens.
For instance, some traders might specialize in trading pharmaceutical stocks, tech company stocks, or other specific markets.
That way the trader can get a lot more expertise in their specific field, which gives them more confidence in their decisions.
How To Choose Between Trading Strategies
Choosing the right trading strategy for you is just as important as learning the markets and figuring out what kinds of trades you want to make. You can always combine different trading strategies, but it's best to choose one at a time so you have a chance to learn before you're adding another kind of trade.
For one thing, you should consider how much experience you have. Some types of trading take more financial and market knowledge than others. While other kinds of trades are more about taking advantage of momentary shifts in the market rather than long-term analysis.
You should also think about how much risk you're willing to take on. You shouldn't take on more risk than you can afford, and you shouldn't make a trade that's riskier than you like. More risk-averse individuals might be happier choosing a safer trading style.
Consider your goals. Are you looking to build your wealth over the long term, or are you looking to make larger profits more immediately. Your goals can help you choose between long- and short-term styles of trading, and may inform the kinds of risks you're willing to take as well.
Most importantly, you should look for a trading strategy that feels comfortable and doesn't take more of your time than you can give it.
Final Thoughts on the Different Types of Traders
There are many types of traders that use a variety of strategies to make money.
Whether you're a fundamental trader or day trader – there are many types of traders that can make good money trading stocks.