What Is a Trader, and What Do Traders Do?

A trader is an individual, firm, or entity buying and selling financial instruments in the securities market, such as bonds, commodities, and stocks. Traders are different from investors as they hold assets for shorter periods to capitalize on short-term gains.

Key Facts Traders

• Traders have a shorter time horizon compared to investors in any market.
• Traders value different strategies to generate profit, including day trading, swing trading, and scalping.
• Communication is a key skill for professional traders to converse with their clients or colleagues effectively.
• Good traders make quick decisions after analyzing the market, but they aren’t impulsive to make a decision.
• Traders have impressive money management skills and can manage their overall portfolio.

What Does a Trader Do?

The primary goal of a trader is to take advantage of short-term price swings to make high returns. The financial market is often volatile, leaving the value of securities unstable. Traders capitalize on instability by buying commodities at lower prices and selling at higher.

As a trader, you have many commodities and markets to choose from. The financial market is a vast ecosystem with specialized areas in specific markets like stocks, forex, commodities, or cryptocurrencies. Therefore, traders can choose a primary trading market that suits their preference in risk engagement and adopt appropriate strategies. They trade with brokerages and sometimes do it for self-profit or work in a hedge fund. 

While traders might operate in the financial market, they are not investors. A trader’s primary objective is short-term investments, distinguishing traders from long-term investors.

Is Trading a Profession?

Trading can be a profession, but not in every instance. Here are the different types of traders you may find in today’s market:

Professional Traders

Professional traders operate full-time jobs in the financial market. They usually operate independently, trading for self-benefit or as employees for financial institutions, hedge funds, or proprietary trading firms.

Many professional traders deeply understand the market’s trends and analysis, often acquired through formal training like a college degree in related fields. Some hold relevant certifications, such as the Chartered Financial Analyst (C.F.A.) designation. 

Traders often operate the market employing sophisticated strategies and advanced tools and technologies, heightening their chances of success. Not all traders are professionals; some are part-timers who see it as an extra income source.

Private Traders

Retail or private traders trade financial instruments for self-investment. They typically work with smaller capital than professionals, using online brokerage accounts to buy and sell assets. Individual traders are more swayed by trends and may change trading strategies based on their financial goals and risk tolerance.

Corporate Traders

Another trading option is corporate trading. Corporate trading involves an individual or team within a company or corporation executing trades for the company’s financial interests. Their work tends to diversify into various financial capacities, such as treasury departments, company investment portfolio management, or commodities trading.

Proprietary traders within financial institutions trade the institution’s funds, while those in hedge funds may manage external capital.

How to Become a Trader

Here are the steps to follow to become a trader in today’s market. We recommend you understand these steps before starting your first real money trade.

#1 Understanding of the Risks Involved

Traders must grasp risk management in the naturally turbulent securities market. Its unpredictable nature exposes them to high-risk scenarios. Novice traders unfamiliar with market complexities may find inconsistencies, resulting in possible losses. Understanding and adopting suitable risk management methods is critical for navigating uncertainty and limiting potential financial setbacks in the volatile trading world.

#2 Building Knowledge

Successful trading requires a good knowledge of asset classes and market dynamics. Traders need analytical skills to understand complex data correctly. This foundational knowledge helps traders to make informed judgments, manage risk efficiently, and navigate the complexities of financial markets. Those seeking long-term success in the ever-changing trading market must be able to learn and adapt constantly.

#3 Choosing a Market

Choosing a market involves selecting a specific financial market to trade. Traders must consider factors like market liquidity, volatility, and personal preferences. Typical markets include:

• Stocks, where ownership shares of companies are traded.
• Forex, involving currency pairs.
• Commodities, like gold or oil.
• Cryptocurrencies. 

Each market has unique characteristics, and traders need to align their expertise and risk tolerance with the dynamics of their chosen market. Making an informed decision on the type of market is crucial for devising effective trading strategies and optimizing the potential for success.

#4 Stay Informed on Market Analysis

Staying informed and conducting regular market analyses are integral to monitoring trade performance. Traders must stay abreast of relevant news, economic indicators, and market trends. Continuous analysis allows for real-time assessment, aiding decision-making and adapting strategies to changing conditions. 

Regularly reviewing trades and assessing successes and failures helps identify patterns and refine future approaches. Embracing a proactive stance toward information and analysis ensures traders remain agile, maximizing opportunities and minimizing risks in the dynamic landscape of financial markets.

#5 Create a Trading Plan

Defining specific hours to engage with the market is crucial in providing structure and discipline for trading journeys. This actively helps traders align their efforts with peak market activity. It promotes a healthy work-life balance, preventing overtrading and potential burnout. 

Creating trading hours enhances focus and decision-making during market sessions, contributing to a systematic and goal-oriented approach. This strategic time management is fundamental for new traders, fostering consistency and developing a successful and sustainable trading routine.

#6 Paper Trading

Paper trading involves testing strategies with a demo account or engaging in paper trades instead of trading with real money. Using a demo account reduces the likelihood of poorly thought, overzealous buying and provides a risk-free environment for newbies to explore their skills and test strategies.

This trading allows them to get familiar with the trading platform, understand market dynamics, and develop confidence without risking natural capital. These initial steps help new traders gain experience and make informed decisions when transitioning to live trading, setting a foundation for long-term success.

#7 Choosing Brokers

Choosing regulated Brokers, for example by the SEC, is a crucial step to pay attention to. It should be essential so you can avoid getting scammed or frauded. Good brokers can also directly enhance your trade by providing strategies and bonuses. 

Brokers facilitate access to financial markets, making it essential to choose a reliable and reputable one that aligns with individual trading preferences. This includes considering fees, available markets, and platform usability.

Become a Successful Trader with Witzel Trading

Witzel Trading is an online brokerage platform for novice and experienced traders. Founded by professional traders in 2012, it provides expert tutorials, strategies, and tips for online trading. With free trading accounts and a focus on beginners and seasoned traders, Witzel Trading poses potential success in online trading.

How Much Does a Trader Earn?

Traders’ earnings vary widely. Statistics have revealed that less than 90% of day traders earn an average of a decent trader’s earnings. Traders’ earnings generally differ and are influenced by their level of effort, investment capital, market unit, and the type of trader. 

In the U.S., hedge fund traders earn an average of $70k annually, with an additional commission percentage for big sales. Although earnings fluctuate significantly based on individual performance and investment size.

While there isn’t a fixed figure, successful traders can achieve substantial profits, making trading a potentially lucrative venture for those who master the intricacies of financial markets.

How Many Traders Are Successful?

The margin of successful day traders is between 1-20%. Determining the exact success rate of traders depends on various factors, including the time invested in learning trading strategies, the strategy employed, and the definition of success. However, it’s widely known that many retail traders face challenges and experience losses.

To be a successful trader requires skills, discipline, risk management, and the ability to adapt to changing market conditions. Studies and industry reports suggest that many retail traders need help achieving consistent profitability. Statistics often highlight the high failure rates, ranging from around 70% to 90% of retail traders reportedly ending up unprofitable.

Many factors may contribute to challenges traders face, including emotional decision-making, lack of a well-defined strategy, insufficient risk management, and underestimating the complexities of financial markets.

It’s important for individuals considering trading to approach it with accurate expectations and an understanding of the risk involved and the continuous learning required to win. Many successful traders emphasize the importance of education, discipline, and managing both wins and losses in pursuing long-term success.

Risks and Opportunities as a Trader

Risk is an added property of trading. Due to the volatility of the market and the emphasis on short-term gains, traders need to be more technical to avoid risks. Therefore, risk management is essential for traders to develop and practice to avoid unnecessary losses. 

It’s unlikely that every trader will encounter problems, but trading is primarily risky, and risk management will mitigate future issues. When handled correctly, risks can almost be completely nullified, allowing traders to enjoy opportunities with little losses.

Strategies

There are several popular trading strategies for novice traders to explore and adapt to their selected market. We recommend that you choose a strategy that works best for you. It’s imperative to only change a strategy when it’s inefficient. 

News Trading

News trading is a strategy where traders make decisions based on significant and timely news events that can impact financial markets. This trading approach involves reacting quickly to news releases, economic indicators, or geopolitical events that may cause price movements in various financial instruments.

Swing Trading

Swing trading is a short to medium-term strategy whereby traders capture sudden “swings” or price movements within a trend. Unlike day trading, which centers on intraday price movements, swing traders may hold their positions for several days to weeks. Entry points are chosen strategically based on trend patterns, resistance levels, or other indicators showing favorable conditions for a swing.

Position Trading

Position trading is a long-term holding strategy where traders focus on capturing major price trends and market movements rather than short-term fluctuations. As a result, this approach is less stressful as it doesn’t rely on frequent market monitoring. On the offside, the positions are typically fewer, implying traders need a more comprehensive assessment of market conditions to make purchase decisions.

Day Trading

Day trading strategy involves opening and closing positions within the same day to take advantage of short-term price movements. It allows traders to constantly monitor the market and make swift transactions in case of any fluctuations.

Trend Trading

Trend trading is a strategy where traders capitalize on existing market trends and momentum. The core aim is to enter positions aligned with the direction of the established trend, anticipating that it will persist. This strategy assumes that assets will continue moving in the same direction for a certain period. 

Trend trading applies technical analysis and indicators to identify entry and exit points, making it a popular strategy for those seeking to capitalize on sustained market movements.

Algorithmic Trading

Algorithmic trading entails using computer algorithms to execute trades automatically based on predefined criteria. It is a strategy that requires programming skills and an understanding of market dynamics.

Scalping

Scalping involves making numerous small-day trades to take advantage of minor price fluctuations. Scalpers aim to accumulate small profits quickly, so they hold for extremely short periods between the opening and closing of a trade.

Price Action Trading

Price action involves identifying price ranges where an asset trades, buying near the bottom of the range, and selling at a high point. This strategy works well in sideways markets and can be done in one of two ways:

• Arbitrage: This involves exploiting price discrepancies between different markets or assets to make a risk-free profit. Arbitrage opportunities are typically short-lived. 
• Breakout Trading: Traders identify critical support or resistance levels and enter positions when the price breaks through these levels. This strategy aims to capture strong price movements.

Difference Between a Broker and a Trader

A trader and a broker play distinct roles in financial markets. A trader is an individual or entity that actively buys and sells financial instruments to capitalize on market movements and generate profits. Traders make decisions based on market analysis, execute trades, and assume the associated risks. They can operate independently or within financial institutions.

On the other hand, a broker acts as an intermediary, facilitating the buying and selling financial instruments on clients’ behalf. Brokers execute orders placed by traders and provide access to various markets. They may work for brokerage firms or operate as independent entities. Brokers earn commissions or fees as a bridge between traders and the financial markets.

Conclusion: Everyone can become a trader

Traders buy and sell assets like stocks, bonds, commodities, and currencies, often involving derivatives, to make a profit. They employ diverse strategies to navigate markets, focusing on risk management to optimize returns. We recommend that new traders learn to rely on market analysis and research to make informed decisions. Doing that will enhance their ability to capitalize on opportunities and achieve successful trading outcomes.

Frequently asked questions on Traders: