3 Types of Traders & Paths to Getting There

Trading is a vast field with various approaches and strategies.

Depending on one’s experience, knowledge, and interests, traders can be categorized into three main types:

• Novice/Amateur
• Generalist
• Specialist

Each type has its own unique characteristics and paths to success.

Let’s look into each category.

Key Takeaways – Types of Traders

• Trading encompasses various approaches and strategies, categorized into three main types: Novice/Amateur, Generalist, and Specialist.
• Novice traders, despite likely initial losses, can learn from their experiences to improve their trading decisions over time.
• Generalists possess broader knowledge of portfolio construction but may collaborate with specialists or use index funds for investment decisions, while Specialists focus deeply on specific market areas or industries to leverage their expertise.

Novice/Amateur

A novice is someone with limited experience and will generally do poorly if they try to tactically trade the markets.

However, this experience of losing can lead to great learning that can help shape the success of future experiences.

For those who just want their savings managed (more of an investing approach), since they’re not a financial professional, they’ll need to find a qualified financial advisor at the right price.

All successful traders were amateurs at one point and have “scars” from bad experiences in the markets.

Some stick with it through and after these experiences until they become good at it while others choose to stop trading altogether.

Best practices for individual investors generally involve passively indexing to broad market indices, driven by their savings rate.

Generalist

A generalist is someone who understands how to build a portfolio and what types of investments to have (i.e., the asset allocation mix) but may not have much specialized expertise (e.g., which securities to choose).

Generalists may work with specialists to help choose the right investments within the context of the type of portfolio they’re trying to build or they might use index funds and avoid picking specific securities.

Example

For example, generalists within a pension fund may understand that they are allowed to allocate, e.g., 35% of the fund to equities (stocks).

They’ll then rely on specialists to help choose investments in light of this mandate.

In other words, good at the big picture but not necessarily into the details.

Specialist

Specialists are those that concentrate in specific areas.

For example, they might focus on the oil and gas industry or a certain type of digital technology.

Specialists might not be good at the broader investing stuff and choose to stay concentrated in a certain area.

Other specialists might choose to diversify past a point to protect what they’ve built, reduce variance, and avoid dependence.

Example

For example, let’s say one is a real estate investor in a specific type of property in a specific city.

As their real estate properties throw off enough cash flow, instead of investing back into the core business, they diversify more into liquid financial assets.

FAQs – Types of Traders

What is a novice/amateur trader?

A novice or amateur trader is someone who is relatively new to the trading world and possesses limited experience.

Due to their limited experience, they might face challenges when attempting to tactically trade in the markets.

This can often result in losses.

However, getting knocked around can serve as valuable lessons, paving the way for better decision-making in future trades.

Is it common for novice traders to lose money?

Yes, it’s quite common for novice traders to incur losses due to their limited experience and knowledge.

However, it’s essential to view these losses as learning opportunities.

The experience of losing can provide insights and understanding that can shape the success of their future trading endeavors – or outside of trading, depending on what they wish to do.

If I’m a novice and don’t want to trade, what should I do with my savings?

If you’re a novice and prefer not to engage in active trading, it’s advisable to seek the services of a professional financial advisor.

They can help manage your savings and investments, ensuring that your money is allocated wisely.

It’s important to find an advisor who offers their services at a price that aligns with your budget.

Who is a Generalist trader?

A generalist trader is someone who has a broader understanding of building a portfolio and determining the right mix of investments, known as asset allocation.

However, they might not possess specialized expertise in selecting specific securities.

Instead, they have a more overarching knowledge of the market and its various segments.

Do Generalists pick specific stocks or securities?

Not necessarily. While some generalists might collaborate with specialists to select the right investments for their portfolio, others might opt for index funds.

By choosing index funds, they can avoid the complexities, transaction costs, and risks associated with picking specific securities.

What defines a Specialist trader?

Specialist traders are experts in specific market areas or industries.

Their focus could be on a particular sector, such as commercial real estate or a specific type of technology.

Due to their specialized knowledge, they have a deep understanding of the nuances and trends within their chosen area.

How do I develop enough expertise to become a Specialist trader?

Begin by identifying a particular market area or sector that genuinely interests you.

This could be a specific industry (e.g., pharmaceuticals, renewable energy), a type of asset (e.g., cryptocurrencies, commodities), or even a particular trading strategy (e.g., quantitative trading).

Are Specialists always focused on one area?

While many specialists concentrate on a specific area due to their expertise, it’s not always the case.

Some specialists might choose to diversify their investments beyond their primary focus.

This diversification can help protect their assets and reduce the risks associated with being overly dependent on a single sector or industry.

Between Novice, Generalist, and Specialist, which type of trader is best suited for me?

The type of trader you should aspire to be depends on your personal goals, risk tolerance, and level of experience.

If you’re new to trading, you’ll start as a novice.

As you gain more experience and knowledge, you can decide whether to broaden your understanding as a generalist or go deep into a specific area as a specialist.

It’s essential to continuously educate yourself and seek advice when needed to make informed decisions.

Conclusion

Whether you’re a novice just starting out, a generalist with a broad understanding, or a specialist with deep knowledge in a particular area, there’s a path available for those looking for a career in trading or investing.

Recognizing where you fit can help guide your decisions and strategies, leading to better outcomes in the markets.