For most, when the word ‘trader’ is passed around in social circles, you are probably envisioning the Hollywoodized versions of institutional trading desks. The title ‘trader’ is going through an identity crisis at the moment as technology now allows everyone, professional designation career trader to weekend warrior investor, the same access to trade. If you trade your own money for a living, do you consider yourself a trader? Can the word ‘trader’ be used to describe someone who trades other peoples money as part of an institution in the same way that someone else is trading their own money?
I think we are all traders, but what is most important are the details in the transaction of the trades. We would probably be better served to break down the term to provide more insight to what traders do, rather than continue to use the same term for so many types of trading. (by the way, I consider myself a professional retail options trader, just in case you were wondering).
Since, the term trader is like an umbrella and actually includes all sorts of types of traders, with all sorts of trading instruments, and time horizons, there is often a lot of confusion about what a trader is really doing in the market. Actually, this umbrella labelling of a trader is probably why there is so much uncertainty about who really is a trader. Let’s take a look at different types of traders and break down this umbrella term, but remember some traders might follow more than one style of trading, thus meaning you identify with several of these areas.
Who gets to call themselves a trader?
There are generally two types of traders, those who manage their own money who are referred to as a retail or individual trader vs those traders who manage other people money, who are called institutional traders. Whether or not you manage your own money is important, especially when it comes to discussing trade strategy and market analysis. The strategies, trade entries and exits that a retail trader can do is usually very different than institutional traders who manage multi millions of dollars. In fact, I would argue that most advice or analysis that comes from an institutional trader (ie. Fund managers, Economists, or Bank Analysts) isn’t very relevant for individual traders. While some may plan to ‘buy and hold’ stocks for many years, often retail traders can’t hedge against losses, or hold losing trades for as long as an institutional trader who manages multi millions of dollars.
The next time you hear an analyst give his advice about holding a position, don’t forget to ask them about how long before they expect to see the anticipated move. What you may be surprise to hear is that some of these analysts may not give you a timeline, or the timeline will be years away (meaning that for you…this can leave you as a sitting duck in a trade for longer than you should be. When a market is down, an institutional trader might actually be buying more on the dip to build a position on a much larger scale than what would be appropriate for retail traders.
Of course, when you trade, you are taking on the control of trading your own account, and sometimes getting another persons’ point of view or outlook on a trading instrument like a stock, etf or futures contract can be a refreshing perspective. Watching and asking institutional traders isn’t a complete waste of time, it might be a second opinion that can help line up with the evidence you collected, but always keep in mind that the timeline, ability to manage a trade might be very different than yours.
Which brings me to my second point, time horizons in trading based on an anticipated move is very important. Depending on how long you hold trades an also classify you in to a sub classification of ‘trader’.
This trader places trades with the objective of entering and exiting the trade within one day. Since there can be different margin requirements for some of the markets that are day traded (especially in futures trades), having a plan to enter and exit a trade with a profit target and stop will be important for a day trader.
A trader who swing trades will often place trades with the objective of holding a trade for at least one night and often will hold the trade from a range of a few days to a few weeks. (This is my personal favorite way to trade)
Long Term Trader
Someone who is a long term trader is a trader who holds trades for months or longer. These types of traders are probably not looking to place a trade every day, but may watch the market for opportunities to enter or exit trades.
Breaking down the word trader can open up a much clearer picture of the markets and help to ensure you are aligning yourself with traders whose input can be most helpful. While everyone in this industry calls themselves a ‘trader’, it is important to know more details about what style of trading he/she is actually doing, and whether the money is personally managed.