For those captivated by the dynamic world of finance, the role of a trader beckons as an exhilarating and potentially lucrative endeavour. In this blog post, we will explore the general definition of a trader, the essential skills required, the training path to become one, the types of information traders use, and the strategies they employ. Additionally, we’ll delve into the distinction between trading for institutions and trading on one’s own account, shedding light on the varied landscapes within the trading realm in Australia.

What is a Trader?

A trader is someone who participates in the buying and selling of assets within financial markets, either on their own behalf or representing another entity. The primary distinction between a trader and an investor lies in the timeframe for holding assets. Investors typically maintain a longer-term perspective, whereas traders often exploit short-term trends, holding assets for brief durations.

Key points:

• Traders engage in short-term buying and selling of financial assets for themselves or entities like banks, brokerage firms, or hedge funds.
• They employ various strategies, such as scalping, day trading, and swing trading, to generate profits.
• Traders differ from investors, who prioritise long-term capital appreciation over short-term gains.

The Role of a Trader

A trader is an individual or entity engaged in buying and selling financial instruments. Traders operate with the primary goal of capitalising on market fluctuations to generate profits. The role demands a keen understanding of market dynamics, risk management, and the ability to execute well-informed decisions swiftly.

Asset types for traders

Assets commonly traded include stocks, bonds, currencies, options, futures, commodities, cryptocurrencies, and exchange-traded funds (ETFs). The choice of asset class depends on traders’ preferences, expertise, and market environment. Traders can specialise in one or multiple asset classes, aligning with their objectives and skills.

Benefits of being a trader

There are several potential benefits of being a trader. Traders are inclined to generate substantial earnings in their line of work, operating within a fast-paced and exhilarating environment. This dynamic atmosphere is particularly appealing to individuals who thrive in constantly evolving spaces. Additionally, traders often enjoy the flexibility of remote work and nonstandard hours. Their role necessitates close and active monitoring of financial markets, providing them with invaluable exposure to market dynamics and the factors influencing them.

Limitations

Every role comes with its own set of pros and cons, and trading is no exception. For traders, there are several drawbacks to consider. Firstly, the profession can be highly stressful and competitive, making it unsuitable for individuals who are not accustomed to such environments. Additionally, there is always a risk of financial loss inherent in trading. Furthermore, traders often work extended hours, and during market downturns, there’s a heightened risk of job insecurity. To excel in this field, individuals typically require specialised education, training, and experience, which can be both time-consuming and costly.

Difference between trading and investing

Two primary approaches exist within the financial markets: trading and investing. Although they share some commonalities, they diverge significantly in terms of time horizon, risk tolerance, investment style, and approach. Trading predominantly focuses on short-term gains, while investing adopts a long-term perspective. Investors often take a more passive stance, periodically adjusting their portfolios to align with their long-term objectives. Conversely, trading involves a highly active approach, characterised by frequent transactions of securities.

Skill Requirements for Traders:

• Analytical Skills. Traders must possess a sharp analytical mind to interpret complex market data, identify trends, and make informed decisions. Analytical skills are important for evaluating risk and reward scenarios and predicting potential market movements.
• Risk Management. Effective risk management is paramount in trading. Traders need the ability to assess and manage risks associated with each trade, including setting stop-loss orders and determining position sizes to protect capital.
• Decision-Making Under Pressure. Financial markets are fast-paced and often unpredictable. Successful traders exhibit the ability to make decisions quickly and remain calm under pressure, especially during volatile market conditions.
• Discipline. Discipline is a cornerstone of trading success. Traders must adhere to their strategies, follow risk management protocols, and resist emotional impulses that can lead to impulsive and detrimental decisions.
• Market Knowledge. A deep understanding of financial markets, economic indicators, and geopolitical events is important. Traders need to stay abreast of market news and trends that could impact their trading instruments.

Trading Strategies

Traders employ a raft of strategies to help secure market position. However, it’s important to note that no strategy is foolproof and they have their own plus and minuses to look out for. 

Scalping

Scalping involves swiftly buying and selling financial products like stocks, futures, currencies, or commodities to capitalise on minor price fluctuations. Scalpers aim to exploit short-term price movements, typically holding positions for mere seconds to minutes. The primary risk associated with scalping lies in the rapid accrual of losses rather than gains.

Day Trading

Day trading is about taking positions in financial assets within the same trading day, manoeuvring through changing market conditions using a raft of trades carried out in the space of a few minutes to several hours. Day traders frequently take advantage of leveraged positions, amplifying the risk associated with their trades.

Swing Trading

In swing trading, a trader goes for short- to medium-term price fluctuations in various financial products, with traders holding positions for longer periods of time – from a couple of days to many months. Compared to scalping or day trading, swing trading is perceived as less risky due to traders having more time to decide – but news or events can influence price trends.

Event Trading

Event trading is about making money from short-term price movements as a result of market developments such as mergers, earnings releases, or regulatory decisions. Traders in this strategy require quick execution of positions seconds before data releases, often employing leverage for amplified profits, but incurring additional risks.

Position Trading

Position trades hold financial assets for extended periods, ranging from weeks to years. The duration depends on the trader’s investment thesis and market outlook, representing a contrasting strategy to the shorter-term approaches employed in scalping or day trading.

Places Where Traders Work

Traders operate in various locations. Independent traders can run their activities from home offices or rented spaces, such as co-working centres with secure internet connections. Alternatively, financial institutions such as investment banks, brokerage firms, proprietary trading entities, asset management companies, hedge funds, or exchanges will have the person as an in-house trader. Whether working on-site or remotely depends on the trading nature and the policies of the respective firm.

Trader Operations

Given the above location preferences, let’s dissect them further:

Institution (on behalf of the company)

Numerous large financial institutions maintain dedicated trading rooms where employed traders execute transactions across a diverse array of products on behalf of the company. Each trader operates within predefined limits, including the maximum position size, maturity, and permissible mark-to-market loss threshold before a position must be liquidated. While the company assumes the underlying risk and retains the majority of the profits, traders receive compensation in the form of a salary along with performance-based bonuses.

Own Account

On the other hand, individual traders engaging in own-account trading operate with their own capital and use professional trading platforms and a discount broker (see below). This form of trading provides autonomy and allows individuals to implement their strategies without the constraints of institutional policies. However, own-account traders bear sole responsibility for profits and losses.

What are Discount Brokers?

Discount brokerage firms offer reduced commissions per transaction but offer minimal to no financial guidance. As individuals cannot directly engage in trading on a stock or commodity exchange under their own account, using a discount broker becomes a cost-efficient means to access markets. Notable discount brokers in Australia include eToro, CMC, and Moomoo.

Types of Information Traders Use

Traders rely on a spectrum of methods to acquire information, an important component for making informed decisions and achieving profitability. They access various types of information to develop contrary perspectives or identify arbitrage opportunities.

Fundamental Information

Fundamental information, known as fundamentals, pertains to data offering insights into the intrinsic value of financial assets like stocks, bonds, futures, currencies, or commodities. This includes economic, industry-specific, and financial data, covering economic indicators, industry trends, company events, and financial statements.

Technical/Market Timing

Traders leverage technical analysis and market-timing information by scrutinising past and present market data to discern patterns and anticipate future asset price movements. Techniques like charting and momentum indicators aid in identifying buying and selling opportunities. Market-timing details encompass economic releases, financial indicators, and sentiment indicators.

Noise Trading

Noise trading involves decision-making based on factors that might seem relevant but typically yield profits akin to random choices. These factors could encompass rumours, gossip, or emotions, leading to market imbalances exploitable by rational traders. Noise traders, often inexperienced investors, lack the necessary tools for profitable trading.

Sentiment

Sentiment reflects the collective view of financial market participants—bullish, neutral, or bearish—toward various assets or financial markets. It’s influenced by economic data, geopolitical events, or company news. Sentiment indicators gauge optimism or pessimism through trading volume, price movements, news coverage, and quantified surveys or polls.

Contrarian Trading

Contrarian trading involves taking a position opposing the prevailing market consensus, often based on the belief that market participants tend to overreact, causing substantial market movements. It requires identifying overbought or oversold conditions and trend reversals, demanding conviction in less popular views.

Arbitrage

Arbitrage exploits price differences between markets or instruments by buying low in one market and selling high in another, generating profits. These opportunities arise due to market inefficiencies or temporary imbalances in supply and demand across stocks, bonds, currencies, and commodities in various exchanges or regions.

Becoming a Trader

Securing a position as a trader within the financial markets often demands extensive groundwork, encompassing education, training, and licensure. Entry-level roles in trading typically mandate at least a bachelor’s degree, with recruiters frequently preferring graduates of economics, accounting, or finance courses. Postgraduate credentials such as an MBA, official licence accreditation from ASIC, and professional certifications like the Chartered Financial Analyst (CFA) or the Chartered Market Technician (CMT) may be a plus for advancing to senior roles.

Conclusion

Embarking on a trader role in Australia’s financial markets is a journey marked by continuous learning, disciplined execution, and the ability to navigate both market fluctuations and personal emotions. Whether within the structured environment of a trading institution or the autonomy of own account trading, success in trading hinges on a combination of education, experience, and a well-defined set of skills. Aspiring traders should embrace the challenges, stay abreast of market trends, and continually refine their strategies to thrive in the dynamic world of finance.

DISCLAIMER: This article is for informational purposes only. BARTERCARD is not affiliated with any trader or brokerage platforms.