Saturday, April 29, 2006

How Professional Traders Differ From Amateurs

I very recently had the pleasure of meeting with a group of professional traders who have been very successful, but who are also looking to maintain and extend their success. Many of these are traders who can make or lose a million dollars or more--in a single day. How do such traders differ from the average independent trader who is trying to make a living? Several differences between the professionals and amateurs struck me:

1) Resources - These professionals had a wealth of analytic resources at their fingertips--and they used these resources. They had a keen eye for how their market should be priced and took advantage of occasions when it moved from that benchmark.

2) Information Networks - The pros knew other pros and constantly talked with them to find out what was going on in the marketplace. This network was an important edge for many of the traders.

3) Strategy - Every trader I talked with could enunciate his or her specific edge in the marketplace and, in some fashion, could quantify that. I could not find a pure gut trader in the bunch.

4) Adaptation - Each of the pros knew details of his or her P/L, but also detailed trading statistics such as Sharpe ratios. When the stats veered off course, they were quick to make adjustments.

5) Complexity - The professional traders employed complex trading strategies that relied on trading different instruments and timeframes, all to exploit a single idea. Many of these strategies involved hedges that managed risk, even as they aggressively pursued their ideas. The idea of buying/selling a single thing and exiting it never arose in my conversations with them.

The most striking difference is that the professional traders viewed their work not only as a career, but as a profession. They were in this for the long haul, and many had long years of experience. They almost always had advanced (often graduate) education in finance or related fields and understood the complexity of markets. They also possessed tools to quantify risk and reward that extend far beyond the popular trading literature.

The bottom line? Knowledge matters. Whether you're a carpenter, artist, or trader, it is very difficult to obtain professional results without professional tools and training.

For more on the development of expertise, check out the articles on my personal site: How Expert Traders Make Decisions; Parts 1 and 2.

8 comments:

Ms. Shawn Angell said...

Funny, I trade options on 5-10 stocks over and over and over. I average 30-50,000 a week off of 200,000. No hedging, no networking for "tips", just a couple of software programs and my laptop which allows me to trade anywhere in the world. Amateur? I think not. Smart trading. Yes. I will match my average against the pros any day.

Ms. Shawn Angell

Jay42 said...

I'm not so sure that trading methods must be complicated though. I have seen many people run charts to show the opposite; that simpler trading strategies can outdo multidimensional ones. However, your greater point about knowledge still holds true. We all need to know why we think we know what we know!

Brett Steenbarger, Ph.D. said...

Well, first off, please allow me to congratulate you on your success. As I recently posted on the Elite Trader site, it wasn't my intention to disparage all independent traders. Rather, I was trying to contrast the professional trader who has sustained success with "the average independent trader who is trying to make a living".

The average trader does not, in fact, make money in the market and there are stats in the industry that reveal how rare sustained success truly is. When you do find a trader who is successful and who can sustain that success across multiple years and market conditions, that's never an average trader. It's generally someone who has placed quite a bit of time and effort into learning and understanding market patterns.

Thanks for your note, and I wish you the greatest of continued success.

Brett

Brett Steenbarger, Ph.D. said...

I completely agree that complexity is not necessarily the answer to trading success. As I describe in some of my articles and in my book, a lot of what traders know is implicit: the result of repeated exposure and automatic pattern recognition. Your distinction between knowledgable trading and complicated trading is an excellent one. Thanks for the note--

Brett

lix said...

ms. shawn angell, can i ask what software programs are you using and what stocks are you following?

Soul of Service said...

I`m sure Ms. Angell is a fine person but as a student & participant in the markets for many years, find it difficult to believe her claim.

DrQuien said...

I developed a trading strategy i call "Triquetra Trading Technique" and it was specifically developed for what I call Recreational Investors (AKA Amateurs).

I totally agree with the fact that Professionals differ from Amateurs because of "resources, networking, and Strategy."

Because of that the "Triquetra Community" has access to all three though a Guide, and access to a Blog that consistently shares ideas, market commentary and trading tips specifically designed for Recreational Investors.

To quote Peter Lynch (from the Magellan fund fame):
"If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."

Arun said...

whats the average return a prof traders make in forex, cfd and commodities?

taking the blog further i believe the major reason of success between a employed/prof and a amateur apart from the listed is the :

-risk appetite- i know very few amateur traders who can sit on a trade up to 62% retracing on daily fx charts.


- money management / hedging

-the time frames in which you trade. most of the institutional trader operate in hourly and daily ranges so less of noise amateurs try 5 min 10 min charts - hence less qualified trades

- constant training - markets evolve and change

- biggest of all ego - "i cannot go wrong" amateur vs for a prof - "when boss say close its a close"

Angell i would like to congratulate on your success. all i have to say is that every thing author mentioned has its value, realization of which might come at different stages of your trading career.