The four trader types describe various trading styles which are sometimes more or less suited to an individuals personality make up.
Knowing one's own individual makeup is an important part of being a great trader and aligning with a trading style that is well suited for your natural design.
If you have not done so already take the TRADER TYPE QUIZ so you can know your type, then read about all four descriptions below.
Ultimately every trader is an individual and most people will feel drawn to various types throughout their career.
Type 1 - Stock Investor
Stock investors are the most traditional of the four trader types. Typical trades can last from many months up to many years or even decades. Stock investors are committed to their trades, and they are determined to let their trades evolve until they reach their targeted price. Unlike the other trader profiles, stock investors are the most focused on long term gains and do not make a decision to close a trade or reposition capital without a lot of thought and consideration.
Stock investors have one primary trading technique: buy a stock long and hold it. Rarely, if ever, would the stock investor personality be interested in trading options, regardless of risk profile. Stock investors do their analysis, make their decision, and stick it out to the end.
Type 2 - Position Trader
Position traders like to take longer term trends and hold their position for as long as it is still practical. Typical position trades last from several weeks or months up to, in many cases, a year or longer. Position traders are patient with their trades and like to allow plenty of time for the trend to evolve over time. However, unlike the stock investor, position traders are more than happy to exit the trade and sit in a cash position if the trend reverses or danger appears on the horizon.
Position traders are well suited for many types of strategies. The primary strategy of a position trader will typically be a long stock trade. However, position traders are not afraid to take a short position if the situation warrants. Position traders are well suited for LEAPS options and shorter term option selling strategies that can be used to increase their ROI and lower their cost basis.
Type 3 - Swing Trader
Swing traders like to take short to mid-term trades and typically hold their position only as long as needed. Typical swing trades last from a few days up to 6-8 weeks. Swing traders are willing to let their trades evolve but are anxious to take profits and remove their risk. Unlike the stock investor or position traders, swing traders are focused on trading with the momentum of a swing and quick to take profits, sit in cash, or reposition into a different trade.
Swing traders are well suited for perhaps more types of strategies than any other trader type. The primary strategy of a swing trader will typically be a long or short stock position, or a position with long calls or long puts. However, the flexibility of the swing trader makes most options strategies a viable choice. Swing traders are well suited for short term options, LEAPS options, option selling strategies, option combos, as well as option strategies designed to take advantage of earnings. Swing traders are perhaps the most versatile trader type as their flexibility allows them to move between various styles of trading with relative ease.
Type 4 - Day Trader
Day traders like to take extremely short term trades and always return to a cash position before the end of the day. Typical day trades last from a few minutes up to a few hours, but never longer than that trading day. Day traders are not willing to let their trades be subject to overnight volatility, and instead choose to make a decision each day whether or not a stock from the previous day is worth trading the next day. Unlike the stock investor or position traders, Day traders are focused on very short term profits, per day gains, and are completely content to scalp a small portion of an intra-day swing before returning to cash and not trading the rest of the day
Day traders have a few strategy choices to work with. The primary trade of a day trader will typically be a long or short stock position. As a pattern day trader, 4:1 margin leverage is permitted which gives day traders a leverage advantage other trader types do not receive. However, the fact the trades move so quickly, many of the strategic techniques afforded to options traders are not practical for a day trader. Day traders can find success day trading at the money or in the money weekly long options, and some tickers such as SPY and QQQ offer multiple expirations during the week, making a few option selling strategies a practical choice for some day traders.
All things considered day trading can be fun, and adventurous, but it can also be stressful and trying on the nerves. Because of the demand to be in front of the computer for multiple hours, day trading can often seem more like a job than an investment decision.
When trying to decide the best way to approach the market, these four trader types are a great place to start. However keep in mind that everybody has at least some of all personalities, which means each individual may choose to explore various trading styles.
Regardless of your trading style, ample opportunity is always available in the market. The key is to pick a trading style, learn the craft well, and execute your plan with committed discipline.