To the newbie trader, this may sound pretty surprising – you know, we just want to milk the markets and make money; what has that got to do with some trader personality type or the likes? Well, in your trajectory as a trader, you will realise that this is just so important and in fact, may be a factor in determining what you make out of the markets.
There are different types of traders in the market, and realising the type of trader you are – or that you want to be – may be quite useful in helping you avoid certain mistakes and become a better trader overall.
Why you should know the type of trader you are
Trading is a game of psychology and as a result, the person you are and your biases or beliefs tend to affect the decisions you make in the market, how long you hold trades, the type of trades you make and in fact, your success or otherwise in the market.
However, you should also note that some other external factors affect the type of trader you are, one of which is the size of your account.
Types of Traders in the Forex Market
Traders may be classified based on a number of criteria, but the most popular classifications are trading strategy and trading timeframe.
Based on Trading Strategy
How do you as a trader make trading decisions? When you buy the Euro and sell the Dollar, what informed that decision? That essentially is your trading strategy; and sub-classifications that exist based on Trading Strategy, include:
- Fundamental Traders
A fundamental trader is one who bases his trading decisions on economic happenings, events and statistics. Essentially, he predicts the direction of price based on what happens in the economy. For instance, when the United States Bureau of Labour releases the monthly employment statistics (i.e. the Non-Farm Payroll, NFP) and it reads that less people were employed last month, it translates to the fact that the US economy might be weak in the short to medium term, and as result the US Dollar may not be strong, hence the fundamental trader will sell the Dollar and buy another currency. (We dig deeper into fundamental trading much later)
- Technical Traders
The prices of currency pairs are reflected in charts that show their movements over time. The technical trader bothers himself with studying these charts. Through the use of indicators and price action strategies, the technical trader can predict future price movements and make corresponding trading decisions. (Trading through technical analysis is discussed in more detail subsequently).
- Algorithmic Trading
The advent of more sophisticated technology has made the world of trading even more interesting. Algorithmic trading involves the use of software, “trading bots”, to make decisions about future price movements based on some pre-programmed criteria.
Big-time traders such as hedge funds have utilised algorithmic trading for years and the use of trading bots by retail traders is on the rise.
Based on Timeframe
Traders can also be categorised into sub-classifications based on the length of time for which they hold each of their trades, ranging from ultra short-term to long-term.
The sub-classifications include:
The scalping trader, or scalper, looks to profit from quick movements in the market. In essence the typical scalp trade may last anywhere from a few seconds to just before an hour. To make such trades, the scalper – if he is a technical trader, which he most likely will be – will have to look at the smallest timeframes, from 1M to 15M.
- Day Trader
The day trader holds trades for within a period of just one day. The typical day trade will last between an hour or two to about 24 hours, or a little more. A day trader making his technical analysis will have to look at timeframes ranging from above 15M to 1W.
- Swing Trader
The swing Trader is one that holds his trades for days, weeks and in few cases, a few months. Swing trading has some benefits in the sense that you tend to see through several market upheavals until the market moves in the direction you want it to. However, this may also work against you in that the market may continue to move further against you for a long time, without making any significant reversals. Both fundamental and technical traders can do swing trading. Analysis will involve looking at timeframes from 4H and above.
- Position Trader
The position trader typically holds his trades for several weeks, running into months or even a year and beyond. Most position traders use fundamental analysis and are usually large institutional investors (banks and hedge funds) that have significant amounts of money to trade.
Factors that affect the type of trader you become
Two factors fundamentally determine the trading system you tend towards:
- Your Personality
Are you the patient type, who can painstakingly wait for a considerable amount of time for his idea to prove correct? Then you most likely will make a good swing trader. On the other hand, if you are the type that just wants just a few dough per day and will not like to watch your trades go into loss before they turn out as profits, then you can master scalping or day trading.
In the same vein, if you are the “economist, political analyst” personality, you may have a bias towards fundamental trading.
- Your Trading Capital
The size of your account may be a deciding factor, irrespective of personality type. Swing trading, for instance, requires significantly more capital than say scalping. Swing trading may require you watching your trades going into negative territory for a while making you watch your capital bleed some amount of equity before it turns out a profit – and that is if it eventually turns to be a profit.
Similarly, fundamental traders may require more capital than their technical counterparts as returns tend to be slow, but a bigger account can magnify returns.
Which Type of Trader is Best?
Each trader type or personality has some advantages working for it over others, and equally, some downsides, too. The issue of which is best is up to every trader to decide, considering the factors outlined above.
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