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What Is a Trader, and What Do Traders Do?

The Definition of a Trader

A trader is an individual who engages in the buying and selling of assets in any financial market, either for themself or on behalf of another person or institution. The main difference between a trader and an investor is the duration for which the person holds the asset. Investors tend to have a longer-term time horizon, while traders tend to hold assets for much shorter periods to capitalize on short-term trends.

Key Takeaways

  • Traders are individuals who engage in the short-term buying and selling of a financial asset for themselves or an institution such as a bank, brokerage firm, or hedge fund.
  • Traders use a variety of strategies to generate profits, including scalping, day trading, and swing trading.
  • Traders can be contrasted with investors, who seek long-term capital gains rather than short-term profits.

The Role of a Trader

The main objective of a trader is to generate profits by buying at a low price and selling at a higher price. What they buy and sell are financial assets that include stocks, bonds, currencies, commodities, and derivatives. The profit generation is achieved through various approaches such as fundamental, technical and quantitative analyses, which aid in identifying market trends and opportunities.1

Traders also manage risks associated with their profession, including market risk, credit risk, and liquidity risk. They may use hedging strategies to mitigate these risks.

Traders play a critical role in providing liquidity to financial markets. Their activities are essential for the smooth functioning of financial markets and the allocation of capital to productive uses.

Skill Requirements of Traders

Traders need to possess several quantitative and qualitative skills to be successful. The skills are a combination of technical, analytical, and behavioral qualities. It is a prerequisite for traders to be experts of the financial markets.

Traders need to have a deep understanding of the asset classes, market dynamics, and various strategies in these markets. Traders have to be analytical. They need to figure out how to process large amounts of data quickly and correctly to make informed decisions about the financial markets in which they trade. Numeracy skills are also important. Traders have to be able to calculate complex financial problems.1

Traders also need to be masters of risk management. They must constantly monitor their current and potential positions to ensure that the risks they take are optimal. Traders must effectively use their stop-loss and limit orders to maintain profitability and margins.

Communication is also a key skill for a trader. Their colleagues, clients, bosses, and other stakeholders need to quickly and effectively understand what their trader is saying so that they can make informed decisions. Finally, traders should have high emotional intelligence. Trading is an intense profession, and traders need to effectively manage their emotions in a highly stressful environment.

Trading Strategies

Traders employ many strategies to produce and maintain profitability. Some of these strategies include scalping, day trading, swing trading, event trading, and position trading. It should be noted that no trading strategy is foolproof; there are advantages and disadvantages to any trading strategy. Traders also consider risks when employing their strategies.

Scalping

Scalping entails the buying and selling of financial instruments such as stocks, futures, currencies, and commodities in quick succession, with the goal of producing small gains on the positions. Scalpers attempt to profit from short-term price movements. The time frame that scalp traders hold positions ranges from seconds to minutes. The risk in scalping lies in the quick generation of successive losses rather than gains.2

Day Trading

The strategy of day trading involves taking positions in financial assets such as stocks, futures, currencies, and commodities within the same trading day. Day traders tend to hold an abundance of trades over minutes and hours, as they maneuver their transactions through changing market conditions. They tend to amplify their trades through leveraged positions. The use of leverage poses an additional risk for day traders.3

Swing Trading

Swing trading involves profiting from short- to medium-term price movements in various financial instruments such as stocks, futures, currencies, or commodities. Unlike scalpers and day traders, swing traders hold their positions for longer time periods. This can be for several days, weeks, or even months and is dependent on the asset, the trend, and the other existing positions of the swing trader.

Generally, swing trading is considered to be less risky than scalping or day trading because swing traders have more time to make decisions. Nonetheless, there are risks involved. News or events can affect the price trends of the swing trader’s portfolio.4

Event Trading

The strategy of event trading entails profiting from short-term price movements triggered from a specific economic or financial event such as mergers or acquisitions, earnings releases, regulatory decisions, inflation data, labor market data, or gross domestic product (GDP) data.

Event traders need to execute their positions quickly, seconds before the data release, to profit from the position. Also, event traders tend to use leverage to amplify their profits. The use of leverage comes with additional risks to the strategy.5

Position Trading

A position trader or a position trading firm is an individual or entity that buys financial assets for the long term. These professionals hold positions for weeks, months, or even years. The time frame of holding the position is highly dependent on the position trader’s investment thesis as well as the economic and financial market outlook.

With the longer-term view, position trading is considered to be less risky than the other short-term trading strategies, as these traders have more time to endure the short-term price fluctuations.6

Places Where Traders Perform Their Duties

Traders tend to work in a variety of places. Those traders who work for themselves may have a home office or may rent one. If that isn’t the case, traders will have roles in investment banks, brokerage firms, proprietary trading firms, asset management firms, hedge funds, or exchanges. Traders may work in the physical office or remotely, depending on the nature of the trading activity and the firm’s policies.

Trader Operations: Institution vs. Own Account

Many large financial institutions have trading rooms where traders are employees who buy and sell a wide range of products on behalf of the company. Each trader is given a limit as to how large of a position they can take, the position’s maximum maturity, and how much of a mark-to-market loss they can have before a position must be closed out. The company has the underlying risk and keeps most of the profit; the trader receives a salary and bonuses.

On the other hand. most people who trade on their own account work from home or in a small office, and they often use a discount broker and electronic trading platforms. Their limits are dependent on their own cash and credit, but they will often keep all profits.

Discount Brokers: An Important Resource for Traders

Discount brokerage firms charge significantly lower commissions per transaction but provide little or no financial advice. Individuals can’t trade directly on a stock or commodity exchange on their own account, so using a discount broker is a cost-effective way to gain access to the markets.

Many discount brokers offer margin accounts, which let traders borrow money from the broker to buy assets. This increases the size of the positions they can take but also increases the potential loss.7

Foreign exchange trading platforms match currency buyers and sellers in the spot, forward, and options markets. They sharply increase the amount of price information available to individual traders, thus narrowing price spreads and reducing commissions. Mahjong Ways

The Type of Information That Traders Use

Traders use a variety of techniques to source information. This is essential to make informed decisions and be profitable in their activities. The types of information that traders access include fundamental, technical, or market timing, noise, and sentiment. With this information, traders can even develop a contrarian view or find arbitrage opportunities.

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