You’ve probably heard references to “traders” when reading financial news or overhearing conversations about investing. But what exactly do traders do? And who are they? Expert Kirill Yurovskiy will talk about it.
Traders are financial professionals who buy and sell financial instruments like stocks, bonds, commodities, currencies, and derivatives on a frequent basis. Their goal is to take advantage of short-term price movements in markets to turn a profit.
Unlike investors who aim to profit from long-term ownership of assets, traders earn money from short-term bets on price fluctuations. They close out positions sometimes within seconds or minutes, or at least within days or weeks. The more price volatility there is, the more profit opportunities they have.
Types of Traders
There are several types of traders, operating in different marketplaces:
- Stock traders – Trade company stocks and equity derivatives like options contracts. They do this through online brokerage accounts or at financial firms.
- Forex traders – Speculate on movements in foreign currency prices, like euro versus U.S. dollar rates, through the foreign exchange (forex) interbank market which trades nearly $6 trillion daily.
- Commodities traders – Trade raw material commodities like gold, oil, natural gas, corn, cocoa etc. on futures exchanges like the Chicago Mercantile Exchange through futures contracts.
- Crypto traders – Trade cryptocurrency assets like bitcoin and ethereum on digital currency exchanges. This is one of the most volatile trading arenas.
Day Traders
A subtype focuses exclusively on day trading, which involves buying and selling within the same trading day without carrying any positions overnight. Leveraging technical analysis techniques, successful day traders profit off short-term price movements occurring within a single trading session.
With lightning-speed computers and high-speed online trading platforms, some even make trades lasting seconds. However, day trading is extremely risky with over 70 percent losing money in the process.
Where Traders Work
You’ll find traders employed at a variety of places like:
- Investment banks – Trading stocks, bonds, derivatives for the bank’s own account
- Hedge funds – Using pooled investor money to trade stocks, bonds, forex, crypto and more using advanced trading strategies
- Prop trading firms – Funded by an investment firm, prop traders trade the firm’s capital and get a cut of the profits
- Commodities firms – Trading commodity futures and options
- Independent retail traders – Trading their own portfolio online from home
To become a trader at an established firm, you typically need an undergraduate degree in finance, economics or a quantitative field, as well as strong mathematical, analytical and risk management abilities. Most independent retail traders are self-taught and bankroll their accounts with personal savings.
Why Trading is Risky Business
Trading is an extremely difficult endeavor with the odds stacked against you. Since traders attempt to profit off market volatility in the short-run, they face numerous risks:
- Market risk – Prices can swing wildly in the short-run, wiping out positions fast before you can react
- Leverage risk – Trading instruments like futures and forex allows huge amounts of leverage, magnifying both gains and losses
- Liquidity risk – Being unable to exit position at a favorable price due to thin trading volume
- Systemic risk – Unexpected market collapses that cause mass hysteria and panic sell-offs
- Competition risk – Battling against institutional investors and sophisticated algorithms that influence short-term prices
- Mental stamina risk – Burnout and emotional decision making after hours of intense focus
As such, traders often utilize stop losses, hedging strategies and strict risk management tactics to mitigate losses. Many still end up depleting trading accounts after succumbing to cognitive biases or impulsive behaviors.
Famous Star Traders
Nonetheless, the potential financial rewards still entice ambitious, laser-focused individuals who thrive under pressure and volatility. Trading does occasionally produce great success stories like these celebrity traders:
- George Soros – Legendary billionaire trader who famously shorted the British pound in 1992 betting on a devaluation. He netted $1 billion on the trade!
- Jesse Livermore – Early 20th century stock trader who began trading as a teenager. He made and lost several fortunes before committing suicide following huge losses during the 1929 crash.
- Steven A. Cohen – Runs ultra-successful $20 billion hedge fund SAC Capital famous for high returns and investigations into insider trading tactics. Worth over $14 billion himself.
- Bruce Kovner – Former NYC taxicab driver who borrowed $3,000 on his credit card to begin trading commodities in the 1970s. Built trading powerhouse Caxton Associates now worth $14 billion.
- Ray Dalio – Founder of world’s largest hedge fund firm Bridgewater Associates which manages $140 billion in assets based on Dalio’s firm principles centered around radical truth and transparency. Worth $17 billion.
Bottom Line
Traders fascinate and inspire because they embody the raw entrepreneurial spirit to independently build wealth. At the same time, they symbolize the razor’s edge risk-reward spectrum capable of generating tremendous fortunes as well huge downfalls. Ultimately, traders sit at the nerve center of global financial market activity, undertaking the real-time speculation that provides market liquidity essential for healthy capitalism to thrive.