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What is a Trader? Trading Explained

October 14, 2020 10:41 UTC

The word "trader" conjures up the stereotypical image of people standing in a stock exchange, waving paper and shouting loudly at each other. It is a profession that is perhaps sometimes misunderstood and which has evolved greatly since the advent of the internet.

So what is a trader? Who are they? In this article, we will give a detailed answer to these questions. We will explore the different types of trader, some of the styles they employ, how to become a trader and more!

what is a trader

What Is a Trader?

To give a simple answer to the question, "what is a trader?", we could say that a trader is someone who buys and sells financial assets - such as shares, bonds, currencies and so forth - in order to make a profit.

Traders can either be employed by a company, a bank or a fund manager, or work independently on a freelance basis. In either case, the job is very similar, with the differences lying mainly in the prerequisites for entry (education, skills) and in how the work is practiced. We will explore these differences in more detail later.

Another related term, "broker", is sometimes confused with the word trader. As noted earlier, a trader is somebody who buys and sells financial assets. A broker, on the other hand, is responsible for executing buy and sell orders on behalf of clients . In other words, a broker acts as the intermediary between the financial markets and their clients.

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Sell-Side and Buy-Side Traders

Traders who are employed by companies, work mainly for financial institutions, banks, investment funds and some large companies. This type of trader trades on behalf of third parties, meaning that they do not invest their own capital, but rather use money entrusted to them by their clients.

Within this group, there are two different types of trader; the sell-side and the buy-side. Sell-side traders, also known as sales traders, are the best known and can be found in investment banks and brokerage firms. They are responsible for the trade of shares, Forex, bonds and other financial assets with, or on behalf of, the buy-side of the industry.

The buy-side traders tend to work for hedge funds or management companies. Their role is to execute orders received from their managers for the best possible price from the sell-side.

Buy-side organisations make their own trading and investment decisions, whereas sell-side organisations tend to react to, or serve, the buy-side.

The Independent Trader

In recent years, thanks to technological advances, a new class of trader has emerged; the independent, or retail, trader. This type of private trader trades online using their own account and capital.

The independent trader often specialises in one, or several, specific markets, with Forex being the most popular by far. However, there are many other markets which are easily accessible to retail traders, such as stocks, commodities, cryptocurrency and so forth.

Swing Traders, Day Traders and Scalpers Explained

Swing trading, day trading and scalping refer to three different trading styles, which are primarily characterised by the time horizon the trader employs.

A day trader, or intraday trader, as the name suggests, holds their positions open for no longer than one trading day at a time.

Scalpers also trade over the short-term, however, they hold their positions open for an even shorter amount of time than day traders. Scalpers hold positions for just minutes, or even seconds, and often use automated trading systems to ensure trades are entered and exited as fast as possible.

Finally, swing trading uses a medium to long-term horizon. Swing traders may leave their positions open for days, weeks, or even months.

How to Become a Trader

In order to be recruited as a trader in a financial institution, you are likely to require a degree in a numerate discipline from an elite university. The path to becoming a professional trader with an institution can be long and difficult. With the increased automation of the trading floor, these jobs have become rarer.

On the other hand, online trading is available to anyone with a computer and an internet connection, which explains why online trading has grown so much in popularity. However, just because it is very easy to start trading online, it would be foolish to believe that making money by doing so is just as easy.

Online trading is a complex activity, which requires in-depth knowledge of the financial markets in order to be successful. Therefore, it is essential to do your research and educate yourself on the intricacies of the financial markets and online trading. The best way in doing so, would be to enrol yourself in a trading course.

How Much Can a Trader Earn?

Individual traders are a very varied group, in terms of background and experience in the financial markets. Their earnings are, therefore, very difficult to evaluate as they depend entirely on the trader and the amount of capital available to them.

An experienced retail trader with a background in finance and a lot of capital to invest is likely to generate more income than a novice trader with no financial experience and a smaller amount of capital.

Final Thoughts

You should now have a clearer answer to the question "What is a trader?" and have an understanding of the types of traders that exist.

The prospect of becoming an online trader can be appealing given its low barriers to entry, however, we would recommend educating yourself thoroughly about trading and the financial markets before getting started. Luckily for you, you can do just that with Admiral Markets.

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About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.