Theoretically anyone who buys/sells in a market is a trader. Different type of traders exert different influence on price behavior.
1. Informed Trader: anyone who has information about the right side of the market
2. Uninformed Trader: anyone who takes the opposite side of informed traders
Speculators:
News Traders
Unlike value traders news traders do no estimate value of an instrument from first principle and all available data. Their object is merely to estimate how value will change in response to their news information. They estimate total instrument values by adding to current prices their estimates of how their news changes prices.
- Time constrained since position should be taken before information becomes publicly available
- Faster price adjusts to trades, Discouragement to further informed trading and decreases realized spread
Sentiment-oriented Technical Traders
When technical traders trade in response to predictable price patterns (“judge market sentiment”) caused by uninformed traders, they effectively act as dealers or order anticipators. If they offer liquidity to the uninformed traders they are essentially dealers. Their trading tends to make the prices more informative.
Information-oriented Technical Traders
Information oriented technical traders profit by identifying predictable price patterns that results when other traders make mistakes. Technical trading strategies that exploit informed traders’ mistakes are rarely consistently profitable. Strategies that work well in the past fail when informed traders learn from their mistakes. (Harris, page 231). They buy extreme winners or sell extreme losers.
Pseudo-informed Traders
They act late… loose because tend to buy when prices are already high and sell when prices are already low.
Market Manipulators and Bluffers:
They profit by disseminating misinformation through media, rumors, prices or volumes.
Liquidity Suppliers:
Value Traders
Seek assistance from financial analysts, statisticians, actuaries, macro-economists, industry economists, market professionals, accountants, engineers, scientists, computer programmers, librarians, and research assistants.
Block Traders
Trade in large block sizes after anticipating long-term market conditions.
Arbitrageurs
Simultaneously buy undervalued and sell overvalued instruments.
Buy-Side Traders
They devise order submission strategies for institutional (large) Traders.
Noise Traders
Noise traders earn more than rational traders, if a) High variance b)Many noise traders c)High risk aversion
Noise traders have always a lower utility
Sunshine Traders
Those who show their full order size (thickness) and intentions publicly. Their success may depend whether the book(market) is plastic or inelastic. For a plastic market:
- Predators cover their positions after a short duration which itself stabilizes liquidity
- At initial phase they may succeed the institution to sell at market
Source: The book Trading and Exchanges by Larry Harris
{ 14 comments… read them below or add one }
Great stuff, thanks for another informative read, I enjoy returning to your blog via twitter to read your updates. I am also hoping to start my own blog soon and your has provided me with some inspiration
Many thanks!
How can I find out which type of trader exerts what type of influence on prices?
thanks again.
Jovi, at different times certain types of traders become more influential in a certain instrument depending upon market conditions. This is why you must have seen reports on why one market is more efficient/inefficient than another.
The understanding on how market functions comes with experience and helps us designing trading strategies.
Thanks… I’m now reading about efficient markets and sources of inefficiency.
Jovi
Hi So many kinds of traders, are there profitable traders also??
Aah Abhishek you got it right! there are NO profitable traders! the entire stock market is a scam by the rich to cheat the gullible public. Hahaha.
Nice briefing of concepts
Excellent read- thanks!
I have decided to buy this book. It is one of the prescribed book in financial curriculum worldwide.
where can I buy this book?
I am new in stock market field. I know that investing in stocks can be a volatile and dangerous game, and making lots of money quickly from stocks and shares requires a lot of skill, knowledge of the market, and luck. Its all about risk .But I like to face risk Life in itself is a all about taking risks. If you want to succeed and make money online you must be willing to risk. You need to step out of your comfort zone. That is when real things get done. .I want to know why the stock market is a good investment (in the long term)?
Before you invest in stocks, you should be aware that they involve some risk because the value of the shares of any one company can radically rise or fall depending upon the financial management of that company and the economy in general. Furthermore, the right type of stocks may be hard to find because each stock purchased or sold must be analyzed and evaluated based upon the limited amount of information available through third party sources. This makes diversification of your investment among many different types of stocks difficult due to the financial resources required. Also, the timing of when to get in or out of stocks is hard to predict and should not be attempted by people nearing retirement age.
which type of traders make most money?
I’m actually quite experienced trader, and I 100% agree with you.
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