What Type of Trader Are You?

Trading is a perpetual process of self-examination. Everyone faces their weaknesses in the market eventually. Some are impulsive, and risk too much too fast. Some are fearful, and close their trades too soon or worse, never pounce when the opportunity is in right front of them.

No one is cognitively spotless, we all have blind spots. The difference between profitable traders and those that will continue to struggle is willingness to do the tough internal work of introspection and reflection.

Thankfully, through this process of internal exploration, you can gradually refine your trading methodology to perfectly compliment your personality and lifestyle. There are decisions you can make which will allow you to play to your strengths and minimize your weaknesses.

Part I - Your Trading Timeframe

First we’ll discuss the four temporal trading archetypes. Pick the one which best matches your personality and lifestyle.

The Scalper

Scalpers operate on the shortest timeframe possible (not including nanosecond-level HFT systems, but we’ll stick to human archetypes for now). Their trades rarely extend beyond a couple minutes and often last a few seconds.

Scalpers aim to capture micro movements in their chosen market and typically execute between dozens and hundreds of trades per day.

Scalping is a niche. It’s not for the general trader. To fit within this niche you firstly have to be well-capitalized because (1) you’re not going to make much trying to capture the tiny movements inherent to this trading style and (2) the commission paid on this number of trades is deadly if you don’t have a custom broker plan tailored for scalping.

As for personality, scalping requires two traits in spades: relentless focus and interest in low-level details. This style has you in front of your chart (or order ladder) all day. It is not the kind of trading you can do on the side while having a day job. Full commitment required.

The Day Trader

Also known as intraday trading, this is the most common style that new traders adopt. Day-trading involves holding trading within the daily market hours, which means all positions are closed at the end of the day and never held overnight. These trades typically last anywhere between 30 minutes and several hours.

Day-trading is often incorrectly sold to newcomers as a source of side income but, much like scalping, it’s actually a poor choice if you’re balancing a job alongside trading. The low-medium term nature of this trading style means that individual executions do require less oversight than pure scalping but still demands significant time commitment.

This style is best suited to personalities that don’t like to sweat a trade overnight, the types that prefer to wipe the slate clean each day. If this sounds like you, day-trading is likely well suited to your disposition.

The Swing Trader

There’s no hard cutoffs like with day-trading but swing trades typically last between one and seven days. This style is centered around specific levels and targets rather than time-based deadlines for closing out.

I consider myself a swing trader. The timeframe described above is what I personally view as a sweet spot, and it’s the range my automated strategies tend to execute around (the average trade length for my BTC bot is four and a half days).

This timeframe allows for active trade management without constricting you to sitting in front of a screen all day. It’s one of the few trading styles that actually can be executed while having a day job. Just set alerts for when price hits levels you’re interested in (more on levels in a future email).

The personalities that thrive in swing trading aren’t so much concerned with the low level details of the five minute chart. They are unlikely to be watching the order flow. This style is uniquely suited to those with a longer term view, but don’t want to just be passively investing.

The Position Trader

Speaking of investing, we have the final temporal style. Position trading is the slowest method of execution, and the trade length can run for up to months.

Position traders aren’t concerned with short term movements, and often operate without stop losses (something I never recommend, but that’s another email) because they are willing to eat significant losses to achieve their long term target.

The key personality trait in play here is patience. To be a successful position trader you have to be truly detached from the day to day price movements in your market. This style of trading is very passive, and usually based in fundamental reasons for investing rather than technical. You don’t sit in a trade for six months unless you have a very good reason.

Part II - Momentum vs Fade

Next we’ll discuss a dichotomy of trading mindsets. Although it’s possible to execute using both, most traders lean heavily one way or the other. For this one, I’d actually not advise just picking one based on these descriptions. You should experiment with each, track your profit/loss stats, and after a sufficient number of real trades, discover which one is for you.

Momentum

Momentum traders look for where directional energy is building. They aren’t interested in catching the exact top/bottom of a move, but rather want to identify when a trend has begun, and ride it as far as possible.

Momentum traders can also be called breakout traders, because they enter their trade after a specific important level has been broken or indicator has flipped. At this point the trader will get in on the side of the momentum, operating under the assumption that the previous barrier has been broken and the market is therefore likely to continue moving in this direction for some time.

Momentum traders must exhibit strong patience, because the cardinal sin of this method is jumping into a trade before confirmation. Fakeouts exist in the markets for this very purpose, to trap overzealous and impatient traders betting on momentum, only to reverse and leave them underwater searching for an exit.

Indicators used by momentum traders:

• Heiken Ashi Candles

• Relative Strength Index

• Simple Moving Average

• Average Directional Index

• Exponential Moving Average

• Moving Average Convergence Divergence

Fade

Faders exist on the opposite end of this spectrum. Calling tops/bottoms is exactly their game, in the short term at least. Faders identify levels where they believe price will reverse. In contrast to momentum traders, who look for the beginning of a trend, faders are the vultures who seek the end.

They are skeptics by design. Discourse usually mirrors market action, so in times of bullish euphoria or bearish dread, faders have a natural instinct to counter-trade - or ‘fade’ - the prevailing sentiment by going against the feelings of the crowd.

For most beginners, I don’t recommend fading as a trading style. Not because it isn’t as profitable as momentum/trend trading, it certainly can be, but because it’s significantly harder for most traders. Following trends is relatively simple, as is identifying momentum in a specific direction, but calling reversal points is a challenge that often leaves inexperienced traders in overly risky positions.

Indicators used by faders:

• Horizontal Levels

• Keltner Channels

• Zig Zag Rotations

• Average True Range

• Stochastic Relative Strength Index

Part III - Fundamental vs Technical

Finally we have a divide that is particularly important because so many new traders try to half-execute both of these methods to justify their position ideas. This is a common trap and prevents the trader from gaining actual expertise in fundamental or technical analysis.

Fundamental

Fundamental traders act on their perception of fair market value. They look at a variety of factors such as financial statements, macro economic conditions, and sector trends to try and determine if a particular stock/resource/currency is undervalued or overvalued relative to its current price.

Due to the inherently erratic nature of pricing (“the market can remain irrational longer than you can remain solvent”), fundamental analysis is not well suited to short term trading. So if you’re mainly focused on the day to day, hour to hour movements of your market this is likely not the path for you.

Fundamental analysis is based on the underlying assumption that, in the long run, the price of an asset will correct itself to fair value. It is compatible with traders who chose Position in part I and Momentum in part II.

Technical

Technical analysis, by contrast, relies on no ‘real world’ data. It is a meta-analysis of sorts in that it exclusively feeds on price information generated by the market itself. In essence: using the past to predict the future.

It’s a form of pattern recognition that rests on purely on statistics. Technical analysts assume that price movements are not random, that they are the result of timeless market psychology. Humans behave in predictable patterns, and these patterns can be measured.

Technical analysis in many ways offers more flexibility than fundamental analysis because it can work in both the extremely short and long term. Scalpers use the same technical indicators and price levels as long term technical investors, just with different settings.

Technical analysis of course also lends itself perfectly to algorithmic trading. Often the biggest struggle technical traders have is managing their emotions and remaining mechanical in their execution. Bots do the heavy statistical and probabilistic lifting while relieving traders of the stress involved in active trade management.