It’s a bit like exchanging currencies

If you have ever been in a country with a different currency, you probably have exchanged your country's currency with the local one. Today this is relatively simple, and there are many banks which do it automatically when you pick up money abroad. That doesn’t mean, however, that they are always offering the best deal. In fact, the exchange prices for currencies change continuously, and exchanging a large chunk of cash one day over another may cost you a lot. Trading works on a similar principle. A trader looks at the fluctuations of the market to make decisions on when to buy and sell - and then they make a profit on the difference.

Who is a trader?

It’s the one who’s got the right time. They are good at selling financial assets in the financial market, with compensation or by the difference of the sales. They can be free agents (these are the famous floor traders), or employed by a financial institution. Profits when trading happen when within a certain time frame called the “holding period” one is able to buy at a lower price and sell at a higher price, or vice versa by “selling short”.

trader

Trading doesn’t equal investing

They both have the same goal: to profit from the financial market. But the way they try to achieve this objective is quite different. Traders are trained to look at the ups and downs of the market to make the best decisions on when to enter and exit positions. They are in it for faster and smaller profits, as they gain from the difference in price their stock experiences. Investors, on the other hand, think more long-term. They aim to eventually gain larger returns. An investor will aim for an annual return of 10%-15% over their shares, while a trader would be very pleased with a monthly 10% return.

The four types of trader styles:

The different types of trader styles are largely correlated to the holding period, in which one buys and sells trading instruments. On a personal note, they differ from trader to trader according to their risk tolerance, experience, level, and personality (you can think of it as some kind of financial horoscope). The “scalp trader” is the position that is held for just a few minutes, or even seconds! And yes, we are aware that is a terrible name. The day traders, as the name suggests, is the position that is help in a day - without overnight. The swing trader is not a dance move, but rather the position that is held from a few days to a few weeks. Last but not least, the position trader is the longest position, and it can be held for a few months, or even for a few years.

Why will your future self thank you

Here we talk about trading as a crucial part of the financial market, but many traders claim that learning how to trade has benefited them in multiple ways outside of their roles. Trading requires an analytical mindset with fast reaction times. It also allows for good emotional control, as traders have to think objectively and without distractions. Lastly, it develops a unique way of thinking about problems, since one is forced to look at its past performances to make sure that they will not make the same mistakes.

Extra bits:

  1. Heads or Tails? 3X more people go for “heads”...Are you one of them?

2. 87%: percentage the U.S. dollar accounts in foreign exchange trades.

3. Both traders and individual investors overestimate their abilities. This is such a popular trend that it has a name: the “better-than-average-effect”.