1. Introduction to Stock Trader Types
  2. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  3. Decision-Making Methods: Informed, Uninformed, Intuitive
  4. Informed Traders: Fundamental Traders, Technical Traders
  5. Swing Traders
  6. Buy and Hold Traders
  7. Value Traders
  8. Trend Traders
  9. KISS Traders
  10. Momentum Traders
  11. Range-bound Traders - Break-out Traders - Channel Traders
  12. Options Traders
  13. Options Seller Traders
  14. Day Traders
  15. Pattern Day Traders
  16. Intra-Day Traders
  17. Intra-Day Scalp Traders
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion

Fundamental and technical analysis are two of the most common ways that traders and analysts of all types determine their investment decisions. Both of these modes of analysis utilize similar pools of data, but they approach their analysis from different sides. While many informed traders use either one or the other type of analysis when making decisions, it’s also possible to use elements of both at the same time.

Fundamental Traders

Fundamental traders have an underlying belief that markets will react to particular events in predictable ways. Thus, with an understanding of the events and the reactions they bring about, traders can make informed predictions about how prices will change. One straightforward example is this: if a company receives approval from government regulators to launch a new product, a fundamental trader may logically expect that the company’s stock price will rise. On the other hand, if the company experiences a financial scandal, the fundamental trader will probably expect the stock price to fall.

Fundamental traders typically make an effort to gather up all available financial and external information about a particular company, stock, or sector as soon as possible. Those fundamental traders working at institutions typically work alongside large support teams who help to gather and process this information.

Traders making use of fundamental analysis may look for the following pieces of information and sources, among others:

  • Economic reports

Fundamental traders look to economic reports to determine whether economic activity is representative of growth or inflation, among other classifications.

  • Political factors

Global affairs and other political elements may also have a major impact on fundamental trading decisions. The stock market rally which has persisted through most of Donald Trump’s presidency is one example of a political factor influencing market conditions.

Possible benefits of fundamental trading

Fundamental traders typically believe that technical trading is overly complicated. They tend to view charts as incomplete or insufficient representations of true factors in a decision process. Instead, they tend to rely on company revenues, profits, cash flows, asset, and liabilities when making decisions. They also closely monitor new products, brokerage reviews, and governmental actions and statistics.

The downside

There are many different ways to interpret the data that fundamental analysts and traders use on a daily basis. If this weren’t the case, every fundamental trader who successfully analyzed the data would arrive at the same investment decisions, and this is not true in reality. Instead, actions by large groups of traders may have a bearing on the way that prices move, and fundamental trading has been criticized for prompting a herd mentality in which the majority rules. Those critical of fundamental traders often suggest that these traders play follow-the-leader without necessarily understanding how the fundamentals of a company are actually affecting the price of a stock.

Technical Traders

Technical traders are not as concerned with fundamental information and data concerning a stock as fundamental traders. Rather, technical traders rely on stock charts and trading information—items including previous prices and trading volume, plus mathematical indicators. Technical traders are likely to consider factors like momentum, patterns, and moving averages when making a decision. They tend to hold that all assets move in price based on offer and demand above other factors.

Because of this overarching viewpoint, technical traders tend to group formations of price relationships. Terms like head and shoulders, tops and bottoms, double and triple tops and bottoms, price channels, and triangles are thrown around often. Technical traders believe that support and resistance price points act as magnets, and that price is consistent in testing itself, with stock prices constantly testing previous price action.

Technical traders utilize graphic representations of trade data which are updated throughout the trading day. They assume that all information about a particular market is already factored into price movement, so additional fundamentals are unnecessary. These days, technical traders tend to utilize a combination of automated analysis and personal, old-fashioned pen-and-paper analysis when making their decisions.

Possible benefits of technical trading

Technical traders tend to believe that they have all of the information necessary to make an informed trade by viewing the past trade and price history of a stock. This means that the information required is more narrowly focused than for fundamental analysis (although it’s not necessarily smaller in scope). Technical traders are adept at following trends in activity and utilize those to predict future activity as well.

High-frequency traders

There is a third type of classification of traders as well, and these are an offshoot of technical traders. High-frequency traders utilize complex algorithms in order to analyze multiple markets and execute orders. These traders tend to prioritize quick execution speeds, and they often use a trading platform with powerful computers as a means of completing high volumes of orders at top speed.

High-frequency trading was previously more popular than it is now. Between 2009 and 2012, for example, high frequency-trading fell from as much as 73% of all U.S. equity trading volume to about 50%.

Broadly, there are two types of high-frequency trading:

  • Execution trading: trading takes place when a computerized algorithm is programmed to complete an order at the best possible price. These algorithms can become incredibly complicated, with orders often split into smaller pieces so that execution can happen at different times.

  • The “set up”: The “set up” refers to small trading opportunities which present themselves in the market based around certain programmed factors. They are often preceded by a technical indicator or a potential catalyst.

High-frequency traders typically hold their portfolios for short periods, and they rely on computerized quantitative models to make their allocation decisions. One benefit of using computerized systems is that these programs can process huge volumes of data, something that typical human traders are unable to match.

For high-frequency traders, capturing even a fraction of a cent of profit on each trade is pivotal. They do not typically employ much leverage, nor do they accumulate positions or hold their portfolios. As such, they tend to compete against other traders who operate at high frequency, rather than long-term investors. As a result of these factors, high-frequency traders often experience a Sharpe ratio which is thousands of times higher than traditional buy-and-hold strategies.

High-frequency trading’s effects on the broader market are not fully understood. Some regulators have claimed that high-frequency trading has contributed to volatility in smaller market crashes which have occurred in recent years. Also, the quotes that high-frequency traders generate can blind other investors to the true market price of a stock. This leaves the rest of traders vulnerable to trading on “old” information; when high-frequency traders are processing data in the span of fractions of a second, human-made decisions seem to take forever in comparison.

In the next chapter, we’ll take a look at a specific type of trader known as a swing trader.


Swing Traders
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