Decision-Making Methods: Informed, Uninformed, Intuitive
There are many different types of stock traders in the market place with varying combinations of methods. The classifications can get confusing. Having said that, there are three very broad areas into which stock traders fall: informed, uninformed, and intuitive.
- Informed traders: This type of stock trader has information about the right side of the market. Again, this type of trader can fall into two more broad categories: fundamental and technical (of which high-frequency trading is one variety).
1. Fundamental traders: Fundamental traders spend their days looking through research, be it about the economy, a specific sector or a company. Research could include SEC filings, financial results, etc. There are many possibilities but the end goal is simple: To look at dozens or even hundreds of companies in order to find those that look the most undervalued.
Such traders will usually spend entire days trying to figure out why a company's stock has not increased more or decreased at a certain point in time.
2. Technical traders: These types of traders use stock charts to make trading decisions, relying on factors such as momentum, patterns, moving averages, etc. to make judgments before entering a trade.
In such an approach, tradesr might not even care which stock or commodity they are trading; all they need is the trading data to decide if they want to buy or sell.
They like to naturally let the market buy them in, and likewise sell them out.
3. High-frequency traders: High-frequency traders are basically an extension of the technical traders’ category. These high-frequency traders use complex algorithms to analyze multiple markets and execute orders based on market conditions.
- Uninformed traders: These are traders who take the opposite view of informed traders.
- Intuitive traders: Whilst this type of trading is not considered as standard as those above, many traders fall into this category. This type of trader develops a general feeling or an instinct, as to the momentum not only in the individual stock, but in the company itself, to find specific opportunities. This does not mean that charts are never used or a study of company fundamentals is never employed, to arrive at this intuitive decision. Intuitive traders might describe themselves thusly:
“I’m not a technician and I really don’t study charts. Also, I’m not big on fundamentals based on the nature of how long I hold a position. This does not necessarily mean that I don’t understand the fundamentals of each stock and what people generally expect, but for the most part I rely heavily on intuition. After watching the same 50-100 names, you start to easily understand how they trade and what moves them. It’s pattern recognition."
These traits overlap, making the stock market what it is - an exciting atmosphere made up of many types of traders. We will for the moment set aside uninformed and intuitive traders, and focus primarily on the types of informed traders.Informed Traders: Fundamental Traders, Technical Traders
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