Mercedes Pantazi, Customer Support Manager, easyMarkets
Knowing what kind of trader you are goes a long way in enhancing your skills, playing your strengths, and achieving success. While there isn’t any definitive way of categorizing various traders with different personalities, a few general types can be identified. Which ones do you relate with and what are the psychological advantages of each?
Full-Time vs. Part-Time
First and foremost, perhaps it is easiest to determine whether you are trading full-time or part-time. Both have their own inherent advantages and disadvantages, mostly having to do with limitations on the amount of time and resources devoted to trading.
The growth of electronic and online trading has given rise to part-time trading, in which one can still maintain a full-time job while allotting some time to watch the markets. This can be particularly challenging especially when one’s trading time doesn’t exactly align with ideal market hours or if one is already feeling exhausted after a day’s work. Still, a lot of part-timer traders are able to maintain consistent profitability even with a few hours devoted to trading, likely a result of being able to refine their trading strategies to suit their schedule as well.
Meanwhile, full-time trading can often be considered an optimal approach to the markets but it does come with more pressure to make money. After all, some full-time traders rely mostly on their profits to make a living while others who trade full-time for a company need to maintain a solid track record or meet certain quotas in order to retain their position or make enough commissions. This can impact trading decisions negatively and make the endeavor more stressful for a full-time trader, but there are ways to fine-tune strategies in order to alleviate these.
Discretionary vs. Mechanical
Next up, you also need to have a good idea of which trading techniques work best for you in order to determine whether you’re a discretionary or mechanical trader. Note, however, that it doesn’t always have to be one or the other as there are strategies that combine a little bit of mechanical trading with some subjective decision-making.
Discretionary traders rely heavily on their own judgment to assess price action and figure out which trade setups to take. This can involve studying market volatility, economic reports, trading volumes, and other information that are processed to produce a trade decision. This is seen as a flexible approach to trading but it can also be hampered by human emotion, as greed or the fear of losing can impact trade decisions.
Meanwhile, mechanical trading involves the use of technical indicators or other studies to generate trade signals. These can be in the form of moving average crossovers, candlestick signals, or inflection points among many others. These mechanical strategies also cover stops, targets, and risk management calculations that can be programmed into a trading robot that can execute trades even while the trader is asleep! However, this does take a lot of time and expertise to develop while other systems available usually come with a hefty price tag.
Conservative vs. Aggressive
When it comes to risk management, traders are often grouped into two types: aggressive and conservative. Generally speaking, aggressive traders favor breakout plays or market entries while conservative traders prefer to wait for trend pullbacks and use limit orders.
These characteristics can also manifest during the management of an open trade. Aggressive traders tend to press their advantage and scale up a winning position while conservative traders usually just trail their stops to protect profits or are able to cut their losses more quickly.
As a trader, you don’t have to decide whether you’re in one group or the other, but it’s important to take note of your own behavioral tendencies to check yourself if you’re being extremely aggressive or conservative. Also, you can move back and forth in the conservative-aggressive scale, depending on market conditions.
Short-Term vs. Long-Term
Lastly, traders can also be classified into short-term or long-term players. Short-term traders cover the scalpers or day traders while long-term players are swing and position traders. Being conservative or aggressive can play a factor in this, as a conservative trader tends to favor longer-term positions while aggressive ones like shorter-term plays.
As with the previous trading types discussed, this is also a function of one’s personality. Short-term traders usually like to know whether they’ve ended the day on a win or with a loss so they close all their positions by the end of the day. These folks are also no stranger to fast-paced market action and are able to process information quickly to make decisions on the fly. Also, this requires laser-focus during market hours with minimal to no distractions, a very reliable internet connection, and an excellent charting software.
Meanwhile, longer-term traders are seen to be the more patient ones who are able to hold their ground even as price fluctuates before eventually moving in the direction of their trade. They are likely to pay closer attention to fundamentals that drive a currency pair or a stock rather than trading volumes or intraday volatility. These traders are able to filter out the noise when it comes to news or other market updates, only making the necessary adjustments when sentiment shifts.
Either approach can work for a full-time or a part-time trader. In other words, there are full-time short-term traders, part-time short-term traders, full-time long-term traders, and part-time long-term traders. The same applies for discretionary and mechanical strategies.
If you are unsure which types you identify with, you may try out each approach on a demo account and keep track of what works for you and what doesn’t. And even after you’ve identified what kind of trader you are, it still helps to reassess every now and then if you might need to shift to a new approach. At the end of the day, it’s important to consider your trading personality and lifestyle so that you’re not forcing yourself into something that’s not working for you.
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