Trading is a style used by various participants in financial markets in order to earn profits in a short span of time. These participants can be Retails Investors, High Net worth Individuals (HNI’s), Financial Institutions, Portfolio Managers, Mutual Funds, Jobbers, Arbitrageurs, and Speculators etc. They use different strategies to make profits through trading. Generally, trading is done in highly active & liquid stocks. Traders try to capture small gains with minimal risk. They can hold a position from several minutes to several hours & sometimes even several days. I would like to give you a brief description of various participants in financial markets:

 

Market Participants

 

• Retail Investors: They are small investors who invest a small amount & expect bigger rewards. They are scared of markets but they enter in hope of big profits. They keep jumping from here to there on the basis of rumors.

 

• HNIs’: As the name suggests, they are also individuals but with a bigger portfolio size. They are more experienced & tactful in terms of market movements. They use advanced tools like technical softwares etc. for their trading. Many of them hire professional consultants to manage their portfolios.

 

• Institutional Investors: Mutual Funds, Insurance Companies, Financial Institutions would come under this category. They make a pool of funds collected & invest strategically. Part of these funds is utilized to capture trading opportunities available in the markets. Most of the fund amount is invested for long-term.

 

• Arbitrageurs: They are very active participants in the markets. They have a different style of trading. Arbitrageurs capitalize on price difference on the same underlying in two different markets. Various strategies are designed to make money through arbitraging. Arbitraging can be done between NSE & BSE, NSE Cash & NSE Future, MCX & NCDEX etc. Arbitraging is a full-time profession.

 

• Speculators: They try to predict the market or stock direction & place their bets on the same. Generally, speculators take bigger risks than other participants in the markets. They stick to their positions as long as they feel that they are right.

 

• Jobbers: Another category of active participant in the markets. They also trade high volumes on daily basis. There is only one mantra to success small profits with minimal risk. They try to capture small opportunities to make profits that exist in the markets. They calculate their transaction cost & execute a trade if they can get anything above it. They are experienced & disciplined traders.

 

 

Generally, when we talk about types of traders, we think that various participants in markets are types of traders. Actually this is mis-conception. One more form of types of traders can be on the basis of their trading position time, they are categorized on the basis of time-duration; for example, long-term, short-term & medium term. These are very confusing terms. Different traders can give you a different meaning for the same. For example, 2 hours may be short-term for one trader & medium term for another. We need to get back to the basics & try to understand the general nature of a trader. A trader may hold a position for few minutes, another may hold for few hours & many other may hold for few days. This is nothing but their style of trading. On the basis of trading position time, the traders can be categorized as follows:

 

Traders Type (Time basis)

 

• Scalpers – They hold a position from 1 minute to 10 minutes. They become part of a move in a stock. This style of day trading involves the rapid and repeated buying and selling of a large volume of stocks within seconds or minutes. The objective is to earn a small per share profit on each transaction while minimizing the risk. They try to capitalize on news, announcements, break-outs etc. They don’t hold a position for more than 10 minutes. They try to keep their funds free to encash the maximum opportunities. Their success mantra is ‘small profits with minimal risk.’ They remove their positions at the earliest if they are wrong. Scalpers trade moving stocks, they don’t trade hard money. They make more transactions than other traders during the day. They create high volumes in the markets. Many of the scalpers they don’t realize that they are scalpers. They can make many trades to earn small profits, but they don’t allow their positions to turn out to be big losers. Brokerage, transaction cost etc. are important issues for scalpers.

·         Day Traders – They hold a position from 10 minutes to 2 hours. Sometimes, they may hold these positions for a little longer-time. But most of the disciplined day-traders, they don’t want to lock their funds, so they try to remove the position within 2 hours. This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops. They take a position after confirmation. They trade stocks with bigger range, higher volatility & good volumes. The traders mentioned in this book would come under this category. Their risk-reward ratio is bigger in comparison to scalpers. Day-traders may use various tools to identify trading opportunities.

 

• Swing Traders – They hold a position from 2 hours to Daily. They may or may not be professional traders. Few of the examples of swing trades are Buy Today Sell Tomorrow (BTST), Sell Today Buy Tomorrow (STBT) etc. Traders may hold swing trade positions for few days. Many of the analysts are specially experts in swing calls. Swing traders use margins to carry their position for a specific time frame. They trade less but rewards are good. Most of the trades are executed on the basis of technical analysis. Swing traders exit their most of the positions in profits.

 

• Position Traders – They hold a position from few Days to few Weeks. They are also known as short-term investors. Generally, they consider trading their part-time business. They try to capitalize on rumors or news/announcements expected from a particular Company, Government, and Regulatory Authority etc.