The way traders operate varies from one individual to another, and also depending on the prevailing market conditions. It is true that a trading strategy that is profitable in one market can be a loss making strategy in another. That said, traders can be broken down into three broad categories – day traders, swing traders and position traders. While they do have similarities, and broadly use the same tools, there are sufficient differences in their trading time frames and approaches to warrant further examination.
Traders
Position traders
Position traders generally use charts, and other technical analysis tools to identify profitable trends in share price. They open their positions and exit the market based on their understanding of the signals of these trends. Position traders hold their positions for varying lengths, from as little as a few days, to several months. Whilst some do, holding positions for longer than a year is relatively uncommon in the position trading community. Position traders are the most common type of trader found when individual investors opt to actively trade their portfolios, instead of entrusting them to professional money managers. As well as understanding technical analysis, position traders holding their positions for longer periods will need to familiarise themselves with an understanding of the various fundamental analysis techniques.
Swing traders
Swing traders operate a lot like position traders, although they typically hold their shares, or positions in the market for shorter time frames; days and not weeks. Swing traders will use technical analysis tools to try and predict sharp swings in the market. Profiting from sudden movements in a share price (both up and down) is where the swing trader makes money. An example could be a sharp drop in the share price of an insurer following news that a hurricane is about to hit a shoreline where they are the primary insurer. By the time the stock rebounds on the news that the damage to property was not as bad as initially feared, the swing investor will have already gone in, and out of the market, i.e. sold high and then bought low at or near the bottom.
Day traders
Mention the word trader to most people, and the image of a Gordon Gecko type of character sitting in front of half a dozen computer screens, executing trades all day is what is conjured. While there is some truth to this, the reality is quite different. Unlike position and swing traders, day traders will never leave a position open overnight. They make their losses, and take their profits all within market movements during a single trading day. Day traders’ time scales are measured in seconds and hours, rather than days and weeks. Dipping in and out of the market quickly and constantly, day trading has been likened by some to being more akin to playing a computer game than actually investing. Fast thinking, quick decision making, great stamina and nerves of steal are clearly requirements for the day trader, who reads his charts on the fly.
While the day trader has been satirised (and pilloried) in the press ad nauseum, the truth is that most people deciding to trade instead of invest their money will end up as position traders. Some of those who decide to become full-time traders do become position traders, with only a very small minority ever becoming full time day traders.
Investment/Trading