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Differences between traders and analysts

Nick Goold

When starting to trade, one key thing to understand is the difference between a trader and an analyst. If you don't understand this difference, trading can be dangerous. Recognising the different market players can also help you appreciate how and why markets move.

Analyst information and trading

Every day you'll check for news and information from analysts to understand the current market. Analysts' reports can help you know what's happening, and it can be tempting to trade according to what they say. However, this information can bias your judgement of current price moves and reduce your ability to respond appropriately to manage risk. 

Making market decisions based solely on analysts' forecasts increases the potential for losses. Trading is not simply about forecasting a future price, but rather about how well you can limit your losses in a well-executed trading plan. Trading is not only about predicting the future price, but also about risk management. Being clear about when to take profits and when to accept losses is more important than deciding when to enter.

What is an analyst?

Analysts are responsible for making financial media forecasts about the market. As such, they use the information every day to keep the media informed of their predictions. 

They use fundamental and technical analysis to predict the future market direction. The analyst's goal is to ensure that more and more traders at the brokerage or bank he works for trade based on his reports.

Analysts are not allowed to trade by law in most countries. They make market forecasts, but do not hold positions based on their analysis. The analyst's focus is on publishing their predictions and gaining popularity among clients. They spend a lot of time analysing market data and appear to be very knowledgeable about the market, but they also understand the difficulty of predicting the future, and they do not make predictions explicitly and unambiguously, in case they are wrong.

What is a trader?

A trader's job is to place trades in the market and make money from them. As such, they continually seek news and market information to make profitable trades.

Traders know from experience that markets are difficult to predict and are constantly looking for trading opportunities. Sometimes they may do fundamental analysis to understand the market, read analyst reports and get different opinions.

However, traders differ from analysts because traders make money from trading, while analysts earn money from writing reports. Traders concentrate on multiple trading opportunities. They aim to have a higher average profit than their average loss, so even if their forecast has a 50% win rate, they can still make money because of a higher average profit than their average loss. So a high win rate is not necessary. It is much more important to judge how much you can increase profit levels and minimize losses, than making overall predictions.

Advice

Predicting the future of future prices in a market is difficult, but not that important. And while knowing analysts' opinions can help you understand why markets move, there is no guarantee how accurate their predictions will be.

Focusing on risk management and specializing in markets and strategies that suit you is more important than market forecasting. A trader's goal is only to make a profit, and too much information can distract a trader from making good trading decisions and sometimes even be misleading. The best way to trade is to make simple trading decisions and follow a sensible risk-reward strategy