The Internet has brought online trading to the masses, prompting a vast increase in the number of day traders. However, access to real-time information has also impacted the number of people adopting alternative investment strategies. So, how many different types of investment trader are there?
Day trader
While day traders will have different investment strategies, numerous common characteristics are easily identifiable. These include:-
• Multiple daily trades
• Multiple relatively small profits
• No overnight risk
• Opportunistic
• Attracted to market volatility
If you are considering online trading, this is the type of mindset you need to accommodate. Looking for opportunistic trades in volatile markets may seem easy in principle, but in practice it can be tricky. It can also be mentally challenging and tiring!
Swing trader
The online trading era has brought information to homes and offices only previously available to professional traders. Some of the more common characteristics associated with a swing trader include:-
• Minute focus on prices and emerging trends
• Act on definitive trends
• Ignore fundamentals
• Identify specific entry and exit points
While many traders pay very little attention to fundamentals, this is undoubtedly the case with swing traders. It is literally a case of trading “boxes” with no emotional attachment or involvement of any kind.
Technical Trader
Technical online trading has undoubtedly seen significant growth in recent years. Based on technical analysis of share price movements, many believe this type of trading can lead to self-fulfilling prophecies. Some of the more common characteristics associated with a technical trader include:-
• Deep insight into historical trends
• Assumption that history will repeat itself
• Very little, if any, interest in fundamentals
• Focused, mechanical, and some may say methodical
Very often, with technical traders, there will be no specific time constraints with their investments. So instead, they tend to run their winners and cut their losers, paying particular attention to stop-loss limits.
Fundamental trader
Before the online trading revolution, fundamental trading was more popular simply because real-time information was not readily available to the masses. A fundamental trader will have their very own characteristics, which include:-
• Comparing/contrasting the “real value” of assets against share prices
• Identifying overvalued and undervalued assets
• Attention to economic data
• Deep analysis of company earnings
• Seeking access to research
The concept of a fundamental trader can often place short-term issues at loggerheads with long-term potential. In the mind of fundamental traders, so long as the long-term fundamentals stay the same, they are unlikely to make any significant adjustments. Indeed, many might see short-term price fluctuations as buying opportunities in the longer term.
Long-term trader
History shows that the stock market has been more lucrative in the long term compared to bank deposits. Warren Buffett is perhaps the most famous long-term trader; although he may describe himself as a long-term investor, his wealth speaks for itself. The characteristics of a long-term trader are relatively focused:-
• Adopt a buy and hold strategy
• Investment based on long-term fundamentals
Similar to fundamental traders, long-term traders will look to adjust their investment portfolio based on changing company/sector fundamentals. While Warren Buffett has historically made significant returns from strong brands, this argument is potentially not as relevant today as it was in the past. There are many new kids on the block looking to disrupt markets!
Summary
While day traders are more commonly associated with online trading, the modern-day online trader can range from a short-term day trader to a long-term investor. Undoubtedly, the Internet has made a massive difference to online trading, giving investors power and information that wasn't available in the past.
Long-term fundamental investment has the scope to incorporate short-term price swings. Regarding short-term trading, it is essential to identify and act upon stop-loss limits. Whatever type of investment trader you identify with, the concept is the same, cut your losers and run your winners – sometimes easier said than done!