The stock market is a market that offers many opportunities to make money. But to do that, there are many lessons you need to learn first. Among these lessons is the different types of traders.
Not all traders came from the same cloth. Here are some of the most common stock traders you will encounter.
A fundamental trader is a trader who focuses on company-specific events to find which stocks to buy and exactly when to buy it.
Trading using fundamentals can be for the short or long term. However, fundamental trading is more closely linked to the buy-and-hold strategy than short-term trading.
Many traders and investors use fundamental trading because of its usage of logic and facts. It’s not a secret that examining and drawing up conclusions based on such facts take time and discipline. Also, one must remember that the financial markets are not always logical.
A noise trader is one that makes decisions without the use of fundamental data particular to the company that issues the security.
These traders in general make short-term trades with the hopes of profiting from different economic trends.
Noise traders also often use technical analysis on the statistics given by market activities. Past volume and price movements offer some insights into the trend or patterns that suggest future market activity and direction.
However, noise traders are notorious for having poor timing. They also often overreact to news both good and bad.
Sentiment traders try to identify and take advantage of trends. Attempting to predict the market is not their game. What they do is find securities that are moving with the momentum of the market.
Sentiment traders use the aspects of both fundamental and technical analysis in an effort to identify and participate in market movements.
Sentiment trading can come in many forms. For instance, a sentiment trader can be a swing trader, who tries to seek wild price movements and avoid idle ones.
Another kind of sentiment trader is the contrarian trader, who try to use indicators of positive or negative sentiment to find likely changes in sentiment.
A market timer is a trader that tries to guess the direction of the security, whether up or down. These traders look at technical indicators or economic figures to predict the direction of the movement.
However, when one looks at the long-term track record of market timers, one can easily see that achieving consistent success is rare.
The reason is that most investors aren’t able to dedicate enough time to do market timing to achieve a decent amount of success. For such investors, long-term strategies are often more effective.
Arbitrage traders are those who simultaneously buy and sell assets in an effort to profit from price differences of the same or similar financial instruments, different markets or in different forms.
Arbitrage is possible because of market inefficiencies and it provides a way for market values not to steer too far away from fair value for long periods of time.