Types of Traders

Traders can be categorized in various ways, primarily by their trading strategies and their level of professionalism. 

Here’s a breakdown:

By Strategy

Day Traders

• Definition – Traders who buy and sell financial instruments within the same trading day. They try to capitalize on short-term market movements. They rarely hold overnight.
• Characteristics – High-frequency trading, use of technical analysis (typically, since fundamental analysis takes longer to play out), reliance on real-time data, and quick decision-making.

Swing Traders

• Definition – Traders who hold positions for several days to weeks, trying to profit from expected price moves or swings.
• Characteristics – Use of technical and fundamental analysis, focus on market trends and patterns, moderate frequency of trades.

Scalpers

• Definition – Traders who make numerous trades throughout the day, holding positions for very short durations, often just seconds or minutes. It’s a subset of day trading.
• Characteristics – Extremely high-frequency trading, small profit margins per trade, reliance on advanced technology and quick execution (e.g., “hot keys”).

Position Traders

• Definition – Traders who hold positions for months or even years, focusing on long-term trends and underlying fundamentals. It’s considered the intersection of the trading vs. investing dichotomy.
• Characteristics – Low-frequency trading, extensive use of fundamental analysis, less concern with short-term market fluctuations.

Algorithmic Traders

• Definition – Traders who use computer algorithms to automate trading decisions, often involving high-frequency trading.
• Characteristics – Dependence on quantitative models, large volumes of trades, significant use of technology and programming skills. More common among professional traders.

Arbitrage Traders

• Definition – Traders who try to profit from price discrepancies of the same asset in different markets or forms.
• Characteristics – High-frequency trading, use of sophisticated models, focus on efficiency and speed. Also more common among professional traders due to the short-lived nature of these opportunities.

By Level of Profession

Amateur Traders

• Definition – Individuals who trade part-time or as a hobby, often with limited experience and capital.
• Characteristics – Learning phase, smaller trades, less sophisticated tools/software and analysis, higher susceptibility to emotional trading. Steep learning curve.

Professional Traders

• Definition – Individuals who trade as their primary occupation, often with significant experience and capital.
• Characteristics – Advanced knowledge and skills, access to professional software and resources, disciplined approach, and often specialize in specific markets or strategies.

Self-Employed Traders

• Definition – Traders who operate independently, managing their own funds and trading activities without affiliation to a firm (perhaps their own).
• Characteristics – Flexibility and autonomy, responsible for their own risk management, varied strategies, and potential for both high reward and high risk.

Traders for a Trading Firm

• Definition – Traders employed by investment banks, hedge funds, proprietary trading firms, or other financial institutions.
• Characteristics – Access to significant capital, advanced software/tools, and resources. Often specialize in particular markets or strategies. Performance-driven compensation. Collaboration within a team of analysts and other traders. May be a hierarchy – i.e., analysts or various levels + portfolio managers.

Buy Side vs. Sell Side

Traders at a hedge fund or prop firm (buy side) take on up to a certain level of risk to maximize reward.

On the sell side, traders are at an investment bank trying to maximize flow by matching bids and offers (bids and asks).

Systematic vs. Discretionary

Traders who write computer code for strategies that can be backtested are considered systematic while traders who research particular theses to trade on that are not based on a model (or use their intuition) or can’t be backtested are considered discretionary.

Related: Systematic and Discretionary Strategies

Role within the ‘Hierarchy’

In the hierarchical structure of a financial firm, there are distinct roles among traders:

Portfolio Manager

• Responsibilities – Oversees the entire trading strategy and risk management. They make high-level decisions on asset allocation, market exposure, and risk management.
• Title Confusion – In large organizations, they may be referred to as “Senior Managing Director” or other senior titles, causing confusion about their role as they may not be directly involved in day-to-day trading.

Trader (Execution Trader)

• Responsibilities – Executes trades based on the strategies and instructions given by the portfolio manager. Their primary focus is on the efficient and effective execution of trades to minimize costs and market impact.
• Title – Often the term “Trader” in large firms refers to this execution role, which is more junior compared to the portfolio manager.

Assistant Trader

• Responsibilities – Supports the execution traders and portfolio managers by:
  • handling administrative tasks
  • monitoring market conditions, and
  • ensuring smooth operation of trading activities
• Career Path – This role is often an entry-level position that serves as a stepping stone to becoming an execution trader or portfolio manager.

In smaller firms, these roles may be consolidated into a single position.

But in larger organizations, the specialization helps in optimizing performance more effectively.

Summary

Understanding these distinctions helps in understanding the diversity to trading and the various approaches and skill levels involved.

Traders’ strategies can range from high-frequency, short-term tactics to long-term, trend-based methods, while their professional level can vary from hobbyists to highly skilled professionals working in sophisticated financial environments.

Traders can also transcend among various levels. We all start out as amateurs and some will eventually consider themselves professionals if they consider themselves to make a living from it.