Trading Types: Explained

Every investor is different. While some people may invest for the long-term in order to build wealth towards a long-term goal, others trade frequently in order to earn a living. While every approach to investing has its own upsides and drawbacks, it's important to understand the trading style that best fits your personality, risk tolerance, availability and preferences.

Position Trader

Position traders have the luxury of time. Of the three major trader types, position traders tend to hold onto their positions for an extended period of time, be it weeks or months. They do not trade actively.

Unlike other traders, position traders tend focus on the "big picture” and ignore day-to-day or short-term fluctuations in the market unless they impact the long-term prospects of the companies or securities that they hold. They tend to be concerned about the fundamentals of the companies that they hold, rather than daily movements of individual stocks. Because they don’t necessarily need to watch the market for hours every day, position traders may use their investments in order to supplement their income or build long-term wealth.

Position traders rely heavily on company fundamentals in developing their analysis of individual companies. While they may use top-down, technical analysis to decide when or at what price point they should buy or sell a position, they invest in primary trends rather than day-to-day fluctuations.

Swing Trader

Like position traders, swing traders tend to hold onto a position for longer than just one day and tend to try to identify the primary trend in the markets and then capitalize on its short-term price momentum. Whereas position traders may be invested in a position for months, swing traders usually enter and exit within a few days or weeks.

Swing traders try to predict the peaks and troughs of a stock's price and tend to track a position's price relative to its baseline. They tend to perform best in times of market fluctuation, when indexes are rising and falling and they can capitalize on short-term oscillations in price.

Swing traders frequently use a combination of bottom-up, fundamental analysis as well as top-down, technical analysis. They generally focus more on charts with a longer time frame, from 15-minute to daily or weekly charts. Because they hold positions overnight, swing traders can capitalize on price moves that are greater than those that happen in a single day, but are also exposed to overnight risk.

Intraday Trader

While swing and position traders can hold positions for days, weeks or months, intraday traders tend to end each day flat, or close out all of their positions before the end of the trading day.

Unlike other types of traders that focus on company fundamentals to determine the direction of a stock, intraday traders are focused on securities' price action between market open and market close. They tend to exploit events that cause short-term movements and will enter and exit positions quickly to capture small profits with each trade.

Generally, intraday trading requires the greatest time commitment of all three trading styles. An intraday trader needs to take the time to read the markets, spot opportunities as they arise and move quickly in order to take advantage of them.

Frequently, intraday traders will “trade the news” or try to capitalize on the effects that certain events, such as the release of company earnings or economic data, will have on certain securities. They may even track social media chatter or sentiment in order to preempt a trend. Intraday traders earn money from small price fluctuations and frequently rely on margin, both to enhance their potential returns and to purchase securities without waiting for trades to settle. Because of the frequency of their trades, intraday traders need to be especially careful about trading costs and commissions, which can eat into their already slim profit margins.