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7 mins read . 27 Jan 2023
Trading is not just about buying and selling a stock. There are a number of nuances to trading and it is not as simple as the classification that trading is for the short term and investing is for the long term. Even within traders, there are classifications. To understand trading in the right perspective, it is essential to first understand what type of trader you are. The traders perspective ranges from a few hours to a few years. Unlike investors who rely more on volume, traders rely a lot more on momentum and shifts, apart from technical charts. Here are the seven popular classifications of traders.
The intraday trader is not interested in taking delivery of the stock. They either buy in the early part of trading and exit before the end of the day or even sell first and then cover up before the end of the day. Intraday trading is normally leveraged trading and hence stop losses are a must. They focus on stocks that are extremely liquid or stocks that are very high in volume and momentum. Profits or losses are adjusted to the trading account and the intraday trader does not have much use for the Demat account.
Trend traders, as the name suggests, typically trade a trend. These trend traders operate with a time frame ranging from a day to a couple of weeks. They either latch on to sectoral trends or stock-specific trends. Their focus is more on stories where the momentum is favourable. As soon as the momentum falters, or the target is achieved, these trend traders are out of the stock. They focus on churning capital rapidly and they are not averse to taking delivery where the trend justifies. In fact, most of the trend traders do take delivery.
Swing traders are an interesting category of traders in the stock market. In a way, swing traders are like trend traders. The difference is that the focus of the swing trader is not on the trend or the story but on the swing. Once they identify the pace and distance of the swing, a typical swing trader can wait from a few days to a few months; and at times even for a few years. Their only criterion is to trade in the direction of the swing as long as the structure of the swing is intact. They are OK with trading the same stock on the long side and the short side, if the swing justifies. The allocation depends on strength of the swing.
Positional traders are the traders who form a view and then take a position and wait for a much longer time. Typically, sectoral trends and thematic trends can last for a few months and these traders are open to trade as long as it is justified. These positional traders would fall somewhere between long-term fundamental investors and short-term traders. If the story is convincing and it is reflecting on the stock momentum, then these positional traders are willing to wait for much longer.
These algo traders are the product of high-frequency trading, colocation and near real-time price feeds. Here the trader builds rules, feeds these rules into algo and then lets the program run the show. They rely more on technology-driven orders and algorithmic trades and less on manual order entry. Algo can be as simple as a slice trade to get the best average price to an advanced trade that is based on a number of regression parameters. In the last few years, these algo traders sit in FPIs and in broking prop desks. They trade in and out very rapidly to trade on very small spreads, which the machine can capture better than the human hand. High-frequency traders have a very high ratio of orders/trades.
This is how quant trading works. The trader typically tries to apply the laws of quantum physics to routine trading so as to be able to make sense of the random movement of markets. They try to identify trends that are not visible to the human eye but can only be done with a very sophisticated quant program. Many of these quant strategies are black box strategies and are not publicly known as they are proprietary in nature. The consistent success of such strategies is yet to be proven fully; either in India or abroad.
Compared to the other traders, the arbitrageur is normally conservative and the strategy is more akin to debt than to equity. It is all about locking the price difference. In the old days, traders would lock in the difference between NSE and BSE or between BSE and regional exchanges. That does not exist any longer. Nowadays arbitrage happens between the cash market and futures market or between a basket of stocks and the index. It is relatively low-risk as the profits are locked in advance, though all are not perfect arbitrages.
So, which type of trader are you? You can now bucket yourself in one of these baskets.