In this article let us look at the different types of traders who are trading in the market. We have teo different types traders: retail and institutional.
Retail traders are independent individual traders like you and I. These people basically trade part time or full-time from their own money, not on behalf of a firm or institution.
On the other hand, we have biggies like investment banks, proprietary trading firms (called prop traders), mutual funds, pension funds, hedge funds, foreign institutional investors, portfolio managers and domestic institutional investors. These large categories of traders in the market are the institutional traders.
Institutions have numerous advantages, such as access to more securities, the guarantee of best price and execution, real-time data, accessibility of sophisticated online brokerages and the ability to negotiate trading fees. They can afford to hire the best researchers and traders. Most of their trading is based on computer algorithms, also known as high frequency trading.
High frequency trading (HFT) is a method of trading that uses a complex computer algorithm to enter and exit a large number of trades within seconds. These programs are designed to make a profit by trading multiple times on very small moves in the price of the stock, hence the term HFT. They trade frequently and in lightning speed
If as a retail trader, you are looking for a larger trend, then you should not be bothered about high frequency trading. However, for day traders it’s a problem as they are concerned about the minute-by-minute movements in a stock’s price during a trading day.
As a retail trader you will be competing with institutional traders who have considerable money behind them and they are very sophisticated.
Institutional traders can move the market. A retail trader will never know what institutions are trading. That is why retail traders rely on charts and technical analysis to know what institutional traders are doing.
As a retail trader your chances of making money are high when the market is volatile. If the market is flat, you may not make any money. However, high frequency traders manage to be profitable as they trade in high volumes and take advantage of very small movements of price.
