Get to know the Trader's Strategy

Get to know the Trader's Strategy

You understand that the stock market presents profit potential, but you know how investors decide when to buy and sell. You may have heard of the words “noise trader” or “arbitrage trader” and would like to learn more about them, but an overview of the most common trading strategies can add insight into the trading terminology and tactics used by many people.

Get to know the Trader's Strategy

Understanding these strategies can help you determine which one best suits your personality. The following strategies are commonly used by many people:

Trader's Fundamentals

Fundamental Trader is a strategy for determining which stocks to buy and when to get them by focusing on company-specific events. Consider a hypothetical trip to a shopping center to put this into context. A fundamental analyst would go to every store in the mall, examine the items for sale, and then determine whether to buy them or not.

While fundamental analysis can be used for both short-term and long-term trading, fundamental analysis is often associated with the buy and hold method of investing rather than short-term trading. With that in mind, the meaning of "short term" is very important to evaluate.

Some trading techniques are based on split-second valuations, while others are based on trends or variables at play over the course of a day; Fundamentals, on the other hand, may not change for months or even years. In the shorter range, publishing a company's quarterly financial report, for example, can provide insight into whether a company's financial health or market position is improving or not. A change (or lack thereof) can act as a trading signal. In fact, a bad news press release can change fundamentals in an instant.

Many investors find fundamental trading attractive because it is based on logic and facts. Of course, finding and understanding these facts is a time-consuming and research-intensive endeavor. Another difficulty is that financial markets don't always act logically (especially in the near term), even though a lot of data suggests they should.

Trader's Sentiment

Sentiment Traders look for and participate in trends. They don't try to guess the market by finding excellent securities. Instead, they seek to select assets that move in line with market trends.

Sentiment Trader uses elements of fundamental and technical research to detect and participate in market movements. There are several techniques for sentiment trading, including swing traders who seek to capitalize on price movements while avoiding periods of inactivity and contrarian traders who try to take advantage of excessively positive or negative sentiment indicators as indicators of a possible sentiment reversal.

Trading costs, market volatility, and the difficulty of accurately anticipating the market mood are just a few of the problems Sentiment Traders face. Professional traders have expertise, leverage, knowledge and cheaper commissions, but their trading tactics are limited by the assets they trade. As a result, large financial institutions and skilled traders may prefer to trade currencies or other financial products over stocks.

Mornings spent checking trends and finding possible stocks to buy or sell are usually necessary for success as a Sentiment Trader. This type of analysis can be time consuming, and trading techniques may require a quick turnaround.

Noise Trader

Noise Trader is a type of strategy in which buying and selling decisions are made without the use of basic data related to the company issuing the purchased or sold asset. Noise Traders usually engage in short-term transactions to profit from various economic movements.

While technical analysis of market activity information, such as past price and volume, can provide some insight into patterns that could signal future market activity and direction, Noise Traders often have a bad time and overreact to both good and negative news.

While the label may be distasteful, most people are called Noise Traders because relatively few make financial decisions exclusively based on basic research. To put this approach into context, consider a comparison of our previous trips to the mall. A technical analyst, as opposed to a fundamental analyst, might sit on a mall bench and watch people enter a store. The technical analyst's choices will be based on the individual patterns or activity that enters each store, regardless of the underlying value of the items in the store.

Technical analysis, like other data-driven tactics, can be time-consuming and may require urgent decisions to capitalize on anticipated contingencies.

Arbitrage Trader

Arbitrage Traders buy and sell assets at the same time to profit from price fluctuations in the same or comparable financial instruments traded on separate markets or in different formats. Arbitrage arises because of market inefficiencies—it offers a mechanism to ensure that prices do not move significantly from fair value over an extended period of time. This form of trading is often associated with hedge funds, and when successful, it may be a relatively simple method of making money.

For example, if a security is traded on two exchanges and cheaper on one of the exchanges, it can be bought at a lower price on the first exchange and sold for a higher price on the other.

It sounds easy enough, but with advances in technology, profiting from market mispricing has become more and more complex. Many traders have set up computerized trading systems to track changes in comparable financial instruments. Any inefficient pricing is often dealt with quickly, and opportunities are often eliminated in seconds.

Market Timer

The market timer tries to predict which direction a security will move (up or down) in order to profit from the movement. They often use technical indicators or economic data to predict the direction of movement. Some investors, especially academics, do not believe that the direction of market movements can be predicted accurately. Others, especially those involved in short-term trading, take the opposite position.

Market Timer's long-term track record of the market implies that success is hard to come by. Most investors will find that they cannot devote enough time to this project to achieve a consistent level of success. The long-term method is often more pleasant and profitable for these investors.

Day traders, on the other hand, would argue that the Market Timer may be a profitable approach, as when trading tech stocks in a bull market. Investors who buy and sell real estate during a market boom will claim that Market Timer may be profitable. Keep in mind that it's not always easy to know when to exit the market, as investors who lost money in tech crises and real estate slumps can confirm. While short-term income may be feasible, there is no evidence to suggest that this method has long-term benefits.

Conclusion

So, maybe none of these trading strategies will suit your personality. There are many more strategies to explore, and with a little study, you may be able to find the one that works best for you. It may be proximity to your investment objectives, rather than company-specific criteria or market indications, that drives your buy/sell decisions.

Some people trade to fulfill their financial goals. Others just buy and hold, waiting for time to pass and asset prices grow. After all, recognizing your own style and plans will give you the peace of mind and fortitude to stick to your chosen route when market turmoil or hot trends make headlines and encourage investors to second-guess their investment options.