Markets are actively traded daily by many different types of traders. Whether an individual or an amateur trader, remember that you are trading on the same playing field as professional traders. A better understanding of how each trader trades will help you to improve your entry and settlement points.
The role of the bank is to assist large customers to trade. They make money from the price difference between customers who want to sell and customers who wish to buy rather than from commissions. Bank traders also trade with their banks' funds. However, at the same time, information on customer orders helps them to find trading opportunities.
Bank traders also concentrate on one or a very few markets. As they specialise in a particular market, they become experts. They trade all styles of trading, from ultra-short-term to long-term, and the strategies they use are based on both fundamental and technical analysis.
Hedge fund traders
Hedge funds receive funds from large investors and receive a fund management fee. They share profits with investors based on a pre-determined allocation. Typically, they are the traders with the largest positions in the market.
There are two types of hedge funds:
Hedge funds that trade based on fundamental analysis hold positions for long periods, from a few weeks to several months. They identify trading opportunities by analysing market supply and demand.
Hedge funds that trade based on technical analysis, on the other hand, mainly use mathematical modelling to identify trading opportunities. Position holding times range from seconds to months, depending on the strategy used.
Prop firm traders
Prop firms are similar to hedge funds but receive their funding from non-institutional investors. Prop firms are characterised by shorter trading periods than regular hedge funds. Prop firms also do not pay traders a salary but a percentage of the profits from their trades as a performance fee. Prop firms, therefore, spread risk across many traders and use both fundamental and technical analysis to trade. Successful traders from banks and hedge funds can sometimes join prop firms.
Brokers make money from brokerage commissions paid by their client traders and usually do not place trades for themselves. However, some do, and it can be dangerous as they may try to make money by selling at a profit on customer buy orders. It is better to choose a broker who does not trade for themselves.
The risk is higher for private traders because they trade with their own funds. Very few have a proper trading strategy, and many trade only using chart analysis. Around 85% of individual traders lose money because they trade alone and struggle without any support from others.
Unlike traders who trade for companies, they do not have instant access to market news and information. They are slow to react, which is another reason they miss out on profits.
Large corporate traders
Traders in large companies trade to reduce their financial risk. For example, Toyota sells USDJPY in the FX market to minimise risk. A fall in USDJPY means a lower value on their USD profits when converted back to JPY. Also, gold mining companies will occasionally sell in the gold futures market, as a future fall in the spot price of gold will reduce the value of their assets. Traders in these large companies usually trade infrequently. Nevertheless, because of the large size of their trades, they can still significantly impact the market.