A speculator uses strategies and usually a shorter time frame in an attempt to outperform traditional longer-term investors. These kinds of traders and investors usually take on many risks, particularly when it comes to anticipating future price movements, with the hopes of making gains that are large enough to offset the risk.
Speculators that take on too much risk usually do not last long enough in the game. Speculators who are more profitable over the longer term control their risk via position sizing, stop loss orders, and monitoring the statistics of the trading performance.
Speculators are usually sophisticated risk-hungry people with expertise in the markets in which they are spending their capital.
Digging Deeper into Speculators
Speculators try to predict price changes and gain some profits from the price movements in the asset. They may also use leverage to magnify returns although this depends on the personal choice of each individual. Also, you can find speculators in any market.
Usually, speculators operate in a shorter time frame than a traditional investor. For instance, a person may call himself an investor when they purchase the stocks of 20 strong companies and hold them for at least a decade, assuming the companies continue to do well in the market.
Meanwhile, a speculator may use all of his or her portfolio capital to buy five stocks, or several futures contracts, expecting them to increase over the next few days, weeks, or months.
Speculators usually use trading strategies that tell them when to buy, when to sell, and how big of a position they need to take.
Principles of Speculation
Speculation sometimes gets tagged as a form of gambling. However, keep in mind that there is a very important distinction.
If a trader is using untested methods of trading, often based on hunches or feelings, it is highly possible that that is gambling, in which the investor is likely to lose over the long run.
Profitable speculation requires a lot of work. But with appropriate and properly implemented strategies, it is possible to gain a reliable edge in the marketplace.
Profitable speculators search for repeating patterns. They seek commonalities between many rising and falling prices, in an attempt to use that information to profit from future ups and downs in price.
It is detailed work and because prices are always moving and there are nearly infinite variables to consider, each speculator usually develops their own unique way of trading.
If a speculator believes that a particular asset is going to appreciate in value, they may choose to buy as much of the asset as possible. This activity, based on the perceived increase in demand, drives up the price of the particular asset.
If this activity is seen across the market as a positive sign, it may cause other traders to buy the asset as well, further increasing the price. This can lead to a speculative bubble, where the speculator activity has driven the price of an asset above its true value.