What type of trader are you?
Assessing what type of trader you will be and your trading style, is an important element of your trading plan, and can determine (along with a host of other variables) whether you will succeed or fail. In this blog, I will look at some of the issues you will need to consider in order to determine which type of trader you are, such as:
1. Are you an investor or a trader?
2. Are you an Intraday or End of Day trader?
3. Are you a fundamentalist or a technical trader?
I will also give you an insight into what sort of trader I am, and the reasoning behind my particular style of trading.
Are You an Investor or a Trader?
I’m guessing that most people (i.e. the ordinary man in the street), run with an investor’s mentality rather than thinking and doing like a trader. Mostly, I think this is due to the way that they have been educated to deal with financial products.
Trading as an art and science is very different to investing. They are essentially two completely different beasts. You need to understand the difference between the two, if you are to become a successful trader. If you currently think and behave like an investor, you are going to have to adopt a whole new way of thinking in order to win at trading. Why?
Let me firstly clarify the difference between an investor and a trader:
Reading this, I hope you will get my point that both adopt a completely different mental approach and crossing the line between the two (without knowing what you are doing) can lead to messy results.
You can move from being an investor to a trader very easily by doing the following:
• Recognising that a ‘buy and hold’ strategy is inappropriate
• Forgetting so much about fundamentals
• Being prepared to go short
• Focusing on the technicals
• Customising your orders – using stops/limits and avoiding market orders
• Not getting emotionally attached to a position
• Using a trading system
So why is this analysis so important?
• You can start to see the different mindset and approach that a trader has and the way he/she will do things differently.
• It’s important to understand your own perspective, so you can build an appropriate trading / investing plan.
• You’d be surprised how many people are unaware of the tricks, techniques, strategies and plans that a trader utilizes, and how you could use them to seriously benefit / improve your results.
• It’s a misconception that traders are big risk takers (gamblers) – they are in fact very calculated, plan meticulously, have structured risk plans and are very consistent – they just do it with huge numbers!!
Are You an Intraday or End of Day Trader?
Depending on how much time you have, you will trade either Intraday or End of Day (EoD). Or both, possibly, if you have plenty of time. You may have a personal preference for one or the other. So what is the difference between the two?
End of Day traders are traders that normally trade after market hours. They enter trades, or adjust stop losses, after the market has closed and settled down. The intention is to enter a trade that can be closed days, weeks and even months down the line.
End of Day traders use technical analysis as their main tools. This style of trading is useful if you want to maintain a full time job and only have a few hours per evening to spare towards your trading.
Intraday Trading, also known as Day Trading, is the system where you take a position on a stock etc. and release that position before the end of that day’s trading session. Thereby making a profit for yourself in that buy-sell or sell-buy exercise. All in one day.
Intraday trading is for the time rich and those who want to maximise their returns or possibly turn trading into their full time job.
There is no rule to say that one is better than the other or that you can’t do both together. However, they do both involve a different trading mentality:
• Intraday trading is fast-paced, quick decision-making, often seat-of-the-pants stuff.
• End of Day trading is more gentile, involving more time spent on decision making and application. The duration of EoD trades will be far longer – some can be a day and some can go on for months.
Like all my other advice, make this part of your trading plan and work out exactly what you are going to do and when you are going to do it.
Are you a fundamentalist or a technical trader?
Technical Analysis Versus Fundamental Analysis
It sounds like a bit of a battle between one and the other but it’s not really. Essentially, though, it is two different thoughts/camps of trading style that are the polar opposite of each other. You can be either a Fundamental Trader or a Technical Trader or you can be a blend of both. It is perfectly possible to apply a mixture of both fundamental and technical analysis – you can use different approaches for different assets – it is really up to you.
When you first start trading, you’re bound to be asked “which camp do you fall into?”. Essentially, the difference between the two camps is:
• Fundamentalists study the course of market movements
• Technicians study the effects
The end goal of trading is always to make money in the best way possible. So the main aim of both approaches is to get you to make the optimum selection of an investment – they simply go about it in different ways.
Let’s take a look at the two in a bit more detail…
Fundamental Analysis (FA) is at its heart, a process of valuation; determining the intrinsic value or real worth of an asset. From this analysis you’ll get three potential outcomes for your investment opportunity:
1. Under Valued 2. Fair Value 3. Over Valued
So ‘Fundamental Analysis seeks value.’
The Technical Analysis (TA) approach is very different. It says that the balance of supply and demand is at the root of price setting – a ‘thing’ is worth what it can be sold for. Dow Theory states that “the averages discount everything” i.e. everything is already built into the price. Technical analysts study the price action. They will look at:
• The movement of price versus time
• Identifying buy/sell opportunities
• When to open/close a position
These three concepts can be further distilled into two main aspects. The identification of:
• Turning points
So ‘TA uses the assumption that everything is already in the price’
TA not only encapsulates the mathematical phenomenon of trading, but also the psychological – which FA can’t. Some academics say that both TA and FA are useless and are made redundant by the ‘Efficient Market Hypothesis’. Traders, who are actually on the ground doing it, would totally disagree with this.
So what percentage of traders follow each approach? These are very loose figures, but as many as 80% use a fundamental approach (a lot less in FX) with the remaining balance belonging to TA. The use of TA is also very dependent on the asset class you are trading and the liquidity of those markets.
Let’s take an overview of the two:
FA – Core consideration = Value
TA – Core consideration = Price
FA – lends itself well to: Equities, Commodities and Bonds
TA – lends itself well to: Futures, Commodities, FX, Equities and Bonds
FA – Holding period of a trade = Longer Term
TA – Holding period of a trade = Shorter Term
FA – Timing = secondary to value
TA – Timing = essential
What Type of Trader am I?
I am a firm believer in technical analysis. I am qualified in the subject, both academically and through professional experience, and it has certainly added another dimension to my trading. It’s just a brilliant way of taking your trading to the next level. However, I don’t rule out or ignore the fundamentals – often a combination of the both can equate to a much more reliable winning trading strategy.
In the past, as a commodity trader in the City of London, I needed to know the fundamentals: supply / demand / economics / news etc. However, as the commodities world evolved into a financial trading hub over the late 90′s and 00′s, it brought with it massive new liquidity, which meant that Technical Analysis became more relevant. Advances in technology also enabled TA to be put into practice much more easily and effectively. As a result of this, I learnt to use both techniques, and I suggest you do the same and learn them well.
As a ‘prop’ trader on my own account I trade Forex, Commodities, Indices and Equities and I have a different level / mix of both technical analysis and fundamental analysis depending on the asset. For example, due to the liquidity of the market, most of my FX trading is based around technical analysis, as are Indices. Equities and Commodities, on the other hand, are a mix of the two to varying degrees.
I trade both Intraday and End of Day, using different approaches for each. When I trade Intraday within the markets, I tend to trade in liquid markets using flow, market anomalies and behaviour, patterns, news and technicals. By contrast, when I do End of Day trading, it is possible for me to trade more illiquid markets, using fundamentals, seasonality, technical and market patterns.
What Trading Style Should You Adopt?
Ultimately, the type of trader you decide to be will depend on many variables. There is no right or wrong style of trading. There is no one ‘type’ of trader. What suits me, may not necessarily suit you. It’s often not apparent when you first start trading, which style of trading will suit you best; it can be a journey of discovery and you may have to adapt your style many times, as you gain experience. So I will end by saying that, as with everything in trading, being realistic and flexible is the key to success.