Types of Traders

There are various types of traders in the market, following varied styles and pursuing unique objectives. Some popular styles include momentum, swing, position, and breakout. Each type of trader has its own varying time horizons and strategies geared to profit from movements in the market. While some may buy and sell on the same day, leveraging short-term price movements, others may enter multiple small-duration trades in minutes/seconds to make small profits quickly. 

Traders also hold positions for longer durations based on market trends. These durations could vary from several weeks to months or even a few years. This is where understanding the difference between position and intraday trading becomes vital. Intraday trading involves buying and selling securities on the same day, focusing on short-term price fluctuations. Positional trading, on the other hand, involves holding the positions for a longer duration. The objective here is to profit from the major trends in the market that will play out over a longer period. Let us now look at some of the major types of traders and their respective trading styles. 

Types of Traders in the Equity Segment

The style and approach of traders differ greatly in equity trading. Please note that they are not the same as the traders in the derivatives market, where they are generally categorised as hedgers, arbitrageurs, and speculators, among others.

Some of the main types of traders in the equity market are  -

Scalpers

They engage in multiple trades in a single day, focusing on fast trades looking for small but frequent profits. Scalping is also referred to as micro-trading, as this style of trading involves multiple trades in a day. Since the profits are generally small, traders need to be aware of the real-time price trends and ensure speed and precision in the trades, as a split-second delay can make or break a trade.

Momentum Traders

Momentum traders ride strong price movements. They capitalise on the momentum of stocks which are breaking out or could break out soon. Here, the trades are based on the direction of the trend. For example, if there is a strong upward trend, traders will sell for higher profits, and if there is a downward trend, they would purchase the stock at the dip.

Breakout Traders

Breakout traders wait for stock prices to break out of the key resistance or support levels. They rely mostly on trend lines, moving averages, and chart patterns to identify resistance and support levels. The support level refers to the point where the price stops falling, a resistance level where the prices stop rising any further. Here, the traders usually enter when the breakout is confirmed and exit swiftly. 

Swing Traders

Swing traders look to leverage market trends and patterns in the short term. They hold trades from a few days to weeks, relying on technical analysis to identify short-term trends and key market patterns before initiating transactions. 

Mean Reversion Traders

Mean reversion traders trade on the principle that the prices will ultimately return to their historical averages with time. The objective here is to purchase undervalued stocks trading below the mean and then sell them above their historical average to make a profit. Some strategies/indicators for mean reversion trading include volume weighted average price (VWAP), Bollinger bands, or pairs trading. 

News-based Traders

News-based traders are those who react to specific events or developments. They make trading decisions based on important announcements and developments, taking advantage of the volatility they usually cause. It may be sudden geopolitical events, natural disasters, or economic reports. These traders look to trade when the market is still reacting heavily to major developments, i.e., just after an announcement or in the moments leading up to any scheduled announcement. 

Pros & Cons of Each Trading Style

Now that you’ve got an idea of the types of traders in the market, it’s time to look at the pros and cons of each style. 

How to Choose the Right Trading Style

Choosing the right trading style depends on your personality, the time you have at your disposal, and your risk tolerance levels. These factors can guide you to choose the best trading style you can consistently follow. Remember that every style involves varying timeframes and strategies while requiring unique knowledge, skills, research, and preparatory commitments. Evaluate the financial risks and other pros/cons of each style before making a decision. 

As a beginner, you need not stick to a single style. You could consider experimenting with multiple styles, gaining more market knowledge and experience and then tweaking your strategy gradually. Over time, you will realise the strategy that works best for you.