Informed traders seek to profit from accurate predictions of future prices.
They collect information e.g. the daily market price sheet and operations updates by the issuers.
This information allows informed traders to predict future prices. They buy when they expect prices to be higher and sell other-wise.
Informed traders employ three main trading strategies.
They may base their trades on:
Estimates of fundamental values,
News about changes in fundamental values, or
Predictions about what other traders will do.
There are different types of informed traders including value-motivated, news traders and order participators.
Value-motivated traders estimate fundamental security values.
They then buy if their value estimates are sufficiently greater than market prices, and sell if their value estimates are sufficiently lower.
Since data collection and analysis are expensive, value-motivated traders can only profit if their gains are greater than their research costs.
News-traders rely on news about events that change fundamental values of securities.
They buy when they believe that values will rise in response to an event and they sell when they believe that values will fall.
Since events have an immediate effect on security values, news-traders must trade very quickly to profit from freshly released information and news reports.
News traders therefore invest in systems that allow them to obtain and act upon information quickly.
Since these systems can be expensive to build and operate, news-traders can only profit if their trading gains are greater than their information collection / news gathering costs.
Order anticipators try to predict trades that other market participants will arrange. If they expect that other traders will buy substantial quantities of securities or contracts and thereby increase prices, order anticipators try to buy first to profit from the anticipated price increases.
They likewise try to sell before other traders sell in anticipation of a price drop. When they trade ahead of anticipated known orders, they are referred to as front-runners.
Source : The Herald