Let’s start by briefly introducing the different players operating in the market. Let’s talk about their characteristics and divide them into some main groups.
- Intraday traders
- Short-term traders
- Medium-term traders
- Long-term investors
These groups have different interests in the market and pursue different time horizons for their transactions. The strongest and most significant movements occur when most of these groups move in the same direction.
TIP: Don’t miss my previous article: Why is psychology so important in trading?
They are the short-term market participants. They buy and sell all other time periods. They don’t care about fundamentals because they are trading short-term. They are primarily interested in order flow and bid and ask prices. They typically run a large number of trades with large positions and hold them in seconds or minutes.
Resellers bring instant liquidity to the market. Previously, scalping was the exclusive domain of internal traders directly on the exchange. But thanks to advances in technology, scalping is now overwhelmingly performed by computers with various sophisticated algorithms.
These algorithms can work on different principles. One of the most common areas in which algorithms are used is arbitration. It tracks the differences between the quotes of different brokers and the momentary price “wavers” that computers try to exploit in milliseconds. In other words, if one broker is “lagging” with a quote while another (the reference broker) is already offering a higher price quote, the computer will buy from the lagging broker and sell as soon as possible. That the price will be equal to that of the reference broker.
TIP: Sign up for Workshop: Fundamentals of Technical Analysis, where we will demonstrate in detail many practical skills that you can immediately use in your operations.
There are those who start the day without a vacant position and end it that way. They typically focus on technical analysis, specific price points, daily news, and macroeconomic data. Like resellers, some intraday traders “read” the order flow in the market.
This group of operators mainly provides liquidity to the market. They trade in ranges that are longer than resellers, on the order of one to ten pips / ticks. This group of traders includes small retail traders, but some hedge funds may also trade hedge funds with various IT strategies.
Or, swing traders are already prepared to hold their positions overnight. They appear after 3 to 5 days. Short-term traders analyze the market from the perspective of fundamental and technical analysis. Most of the time they try to trade the highs and lows of the trading ranges or the bounces of the trend lines. They depend on short-term market momentum.
This group includes many retailers who do not have time to sit at a computer during the day to monitor the markets. This group is not a trendsetter. Rather, they try to adapt to developments and take advantage of events that cause the market to fluctuate in the short term. However, this category also includes, to a lesser extent, professionals, whether from funds or banks.
Medium-term traders are very close to short-term traders in their analysis. Both fundamental analysis and technical analysis follow. However, they have a longer-term vision. For these traders, the term “swing traders” is widely used, as they try to participate in oscillating movements in the medium-term trading ranges. If short and medium-term traders act together, the market can develop at least one short-term trend movement. Medium-term traders look at the trade more in terms of the duration of the price movement than from a time perspective.
This group of merchants includes retail and professional merchants. The composition of this group is very similar to that of short-term traders. The only difference is that these traders are willing to hold positions for larger profit targets.
These traders have a much closer relationship with the securities they own. They keep the securities they buy for months or years. When long-term investors begin to accumulate or distribute their positions, it can be the beginning or the end of a long-term trend. This is because this group is made up mainly of large institutions that manage large sums of money. They can place large orders on the market and build a long-term position.
When other time frames join in on this activity and begin to act in concert with long-term investors, long-term trends emerge, which can last for weeks or even months.
As I said before, this group is made up mostly of professionals. These include banks, pension funds, insurance companies, and mutual funds. A large percentage of institutions invest most of their managed capital in bonds. The remainder of your investment capital is primarily made up of stocks or stock indices.
The analysis of all time periods is the basis of success for all. It can help you better spot trends. How to correctly identify a trend and everything that needs to be taken into account to do so, I will describe in detail in one of the next articles. There is nothing more sensible than to operate in the direction in which the majority of market participants operate, and especially those in the long to medium term. From my own experience, I highly recommend trading the long-term trend. However, if the trader is experienced enough, trading against the trend offers many interesting opportunities.
Before entering the market, always look at a time frame higher than the one you plan to trade. This simple rule can help you avoid opening a position against the long-term trend. And thus avoid unnecessary losses.
In December, I am preparing for the last “Fundamentals of Technical Analysis” workshop this year, so please feel free to reserve your spot.
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