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Identifying The Basic Types Of Traders

When it comes to trading and investing in the financial markets, there are countless trading systems and styles being utilized simultaneously. Oddly enough, many of these styles are profitable and many of them also lose money. Although a multitude of variations and permutations, there are three basic types of traders out there. Each has his or her own unique set of criteria and objectives. They are also characterized by a different set of probabilities as well.

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Long Term Trading

The first and perhaps the most well-known type is the long term trader. In fact, many refer to these as investors rather than traders. They subscribe to the old “buy and hold” methodology. They tend to peruse the fundamentals of a stock such as earning reports, mergers, board of director decisions, and the company’s financial sheets.

Long term traders look for that diamond in the rough that is poised to make a huge move. It is quite common for them to run through 5-7 losing stocks before finding the one winner. That one winner typically makes their whole month or year and makes far more profits than the losses of the last handful of trades.

Long term traders have the lowest winning percentage of the three trader types, but earn far more per winning trade than the others. They also have to make the fewest amount of trading decisions. These guys might buy a stock and hold it for several years.

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Swing Trading

The second type of trader and perhaps the most popular are the swing traders. They are called swing trader because they look to capitalize on “market swings”, or the natural see-saw price action of stocks. Many of them take either long or short positions on stocks.

Swing traders tend to react to technical analysis which pertains to signals from a stock’s daily price action. They study charts and other technical indicators to identify patterns that prove profitable based on past performance. They are looking for stocks that are hot and already making powerful moves. Many experts call these “momentum stocks”.

Swing traders must have better winning percentages than long term traders because they tend to enter far more trades. It is quite common for swing traders to enter a stock position for anywhere from a day or two to perhaps a few weeks. They generally make far more decisions than long term traders as they may make a dozen trades a week, whereas a long term trader may not make a dozen trades in a year.

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Day Trading

The third type of trader is the new guy on the block which is the day trader. Because of the advances of the internet and technology, day trading is much more available now to traders and investors. Day traders are exactly what the name implies, they could make anywhere from a dozen to hundreds of trades per day. Most of them end the trading day with “flat accounts” which means they hold no positions when the final bell sounds.

Two things are very important to the day trader, and that is liquidity and volatility. They need both to be successful. They target the most liquid stocks and try to capitalize on the “spread” which is the difference between the bid and ask prices. They tend to take large positions and scalp out a fraction of a point profit by closing it out a few minutes later. Volatility gives them more opportunities to profit.

One of the most important tools for a day trader is technology. They must get quotes as they occur to be profitable. Slippage, which the difference between market quotes and the price your order gets filled, is deadly to day traders.

Day traders must have a high winning percentage because of the volume of their trades. Their style of trading is characterized by making lots of decisions each trading day. As the old saying goes, “day trading is not for the weak at heart.”

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