It’s important for financial market players to know their identity to be successful in the world of trading. A mistaken identity is often the cause of a failure for new aspiring traders. There are at least 3 distinct categories of financial market players and some combination of them:
- Investor
- Speculator
- Gambler
1. Investor
An investor is someone who buys low and sells high. This group of people buy when the asset is undervalued and unloved by the general public. They buy with the intention of holding it for a long term. They don’t flip their position very fast. This category of people generally don’t care too much about day-to-day fluctuation. They understand they may not be able to pick the exact low thus they enter the market gradually in stages. Since they intend to buy and hold, they generally will not use any leverage as they plan to accumulate and hold it for long term. They understand patience is virtue and not in a rush to realize any profit. Usually they hold positions for a long term such as months and years.
2. Speculator / Trader
A speculator (trader) on the other hand is someone who buys / sells with the intention of flipping their position relatively fast (frequent) to make profit. Professional traders will use some leverage to magnify their gains while still limiting their losses. As they don’t intend to hold it for a long term, they often trade within a framework. This framework is what we call a trading system. There are many different trading system and these system usually have specific rules of entry, stop, and target profit.
When the framework fails, professional traders will get out of the position. A failure in the framework, such as when certain price level gets violated will trigger the stop loss. True professional traders always know how much money they bet on a single trade and they will limit their risk in a single trade to a certain percentage of their capital. A smaller percentage of speculator group does a long term trade with the intention holding positions for months / years. Majority of retail traders however are short term / medium term speculators who intend to hold position for few hours to few weeks at most.
