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Janet in Trading psychology,

Motivations That Influence Trading Strategies

Traders and speculators have different classifications based on their differing characteristics or strategies carried. One method of grouping traders is by the motivation they follow in order to pursue profits. Some of the most common motivations are:

Information-Motivated Traders

Information-motivated traders possess or seek sensitive and useful information which, while publicly available, is probably not disseminated properly into the the market. This type of trader usually prefers to act quickly upon the discovery or analysis of that information, rather than waiting for the market as a whole to react. Because of fear that they might lose an opportunity to use their information advantage quickly, they prefer speed of execution over price certainty. Information-motivated traders usually place trades in large quantities.

Value-Motivated Traders

Value-motivated traders carry out extensive research and place a value on every stock in their spectrum. They only trade when the stock price moves at a justified range, based on the results of the research. They value price certainty over speed of execution and they are prone to use limited orders to trade. They distribute their trades rather than trade in large quantities, which makes them more infrequent traders than information-motivated ones.

Liquidity-Motivated Traders

Unlike most traders, liquidity-motivated traders want to release cash and act as counter parties to more informed traders. As they are not information sensitive nor have a specific price range, they usually tolerate trade timing uncertainty. They do, however, prefer low commissions and small impact on the market. Their types of trade orders include market orders, market-not held orders, portfolio trades, principal trades, as well as orders on electronic crossing networks.

Passive Traders

Passive traders, mostly acting on behalf of passive or index fund managers, seek liquidity with cost as their primary concern. They value price certainty over speed of execution, and therefore they also prefer low market impact and low commissions. The types of orders they prefer are limit orders, portfolio trades and electronic crossing network. A disadvantage to this type of trader is that the timing usually remains uncertain.

Motivations That Influence Trading Strategies