Pro Traders vs Amateur Traders. What’s the Difference?

Trading with former investment bank and hedge fund trades and training over 4000 amateur traders has given me a great insight into the difference between how professional traders interact with the market vs amateur traders.

Following are 6 critical facts that differentiate a successful trader from the amateur.

Market cycles.

The Professional Trader.

It doesn’t matter what market you are trading the price action will change as the market cycles chance. The professional trader understands and accepts that the edge they are using is going to perform better is certain market conditions. They understand and expect that Central Banks and their monetary policy programs will impact their trading edge and from time to time they should expect a period of drawdown. Their success relies on continually following their edge through the various market cycles and ensuring whenever they place a trade they stay with the trade to the target or stop loss.

The Amateur trader

They expect certainty and expect that the edge they have learnt is going to perform consistently and so long as they trade the system correctly, they will be able to pull a consistent amount of money out of the markets each month. This is nonsense and therefore the amateur is left with a very empty and hollow feeling when they cannot generate a consistent income. The nonsense theory that you can consistently pull $500 per day out of the market is generally peddled by trading educators who are not interested in your personal success and are only interested in selling you their unprofessional training program.

Consistency.

The Professional trader.

Does not switch up the edge they are using at the first sign of failure and they maintain a high degree of consistency in their analysis and execution of every trade. They understand that if they deviate from the edge, they will lower their profit-making opportunity and even after a string of 2 or 3 losing trades they will still consistently apply the same risk management and execution technique. They trade like a sniper; they keep things consistent by keeping things simple.

The Amateur trader.

Is continually changing their edge the moment they have a losing trade. They are extremely inconsistent with how they use their edge and how they manage risk. In fact, most amateur traders have no consistency in their trading approach and fire off at the market like a duck hunter shoots at a flock of ducks flying up out of the duck pond. Due to the inconsistency of the amateur trader it raises their emotion and they make irrational decisions and cannot remain clear, calm and decisive.

Expectations.

The Professional trader.

Does not have expectation on trades because they know that anything can happen on one trade and nobody can guarantee a result on a single trade. Their expectations are realistic and their goal is to ensure they consistently compound money over time and are not trying to shoot the lights out on one trade and make money quickly. They understand that by increasing their expectation on a single trade will only likely result in them increasing volume which increases the potential for a major drawdown.

The Amateur trader.

Has a high degree of expectation on each trade and at times is sucked into thinking they will increase the amount of money they trade because “this one looks like it might be a winner.” They continually self-sabotage results experiencing large drawdowns on the trades they believe will be winners as they widen their stop loss or worse trade without a stop loss because they have fallen in love with their trade. They don’t understand that anything can happen on a single trade and just because price moves against them does not mean it will eventually come back into profit. Expectation is one of the biggest account killers for amateur traders.

Risk Management.

The Professional trader.

Understands that one trade can kill an account and their consistent risk management is their only salvation as a trader. They cannot control price but they can control the volume on each trade and where they put their stop loss. Most professional traders do not allow their account to be drawn down by more than 3% on a single trade. They rarely experience a major drawdown because they are steadfastly consistent with using stop losses on every trade and position sizing their trades correctly to win big and lose small.

The Amateur trader.

Acknowledges the importance of risk management but rarely adheres to a strict money management plan. They are not consistent with how they apply volume on each trade and allow trades to draw down their account more than 3% on a single trade. Like virtually every aspect of their trading there is no consistency in their risk management and sadly this is the reason why they leave the trading business. Their account has been drained to zero because of the lack of consistency in their risk management.

Thinking in numbers.

The Professional trader.

Thinks in a series of trades and does not think trade to trade. They have a high degree of detachment from the money on a single trade because they understand their success is going to be determined by how well they execute their trades over a series of trades. Trading to a professional trader is a numbers game. Every trade must be aiming to win more than they lose and this ensures that even with a 50% success rate they will still make meaningful money over time. They understand they are playing a probability-based game and their edge will deliver profit not on a single trade but over a series of trades.

The Amateur trader.

Does not think in probabilities, they think in certainties and sadly are not able to play the numbers game over a series of trade because once again every aspect of their trading is inconsistent. They often implode after a couple of losing trades and immediately start to jump out of trades early and often leave trades running into loss far too long. They are so engrossed in each individual trade it is impossible for them to think in a series of trades approach. This sadly leads them to be very emotional and they make irrational decisions based on their profit and loss on a single trade.

If there is one word that differentiates an amateur trader from a professional it is the word consistency. Trading is a pure numbers game that is very simple to play but certainly not easy to play. Apply the strategies of a professional trader and you will over time have a wonderful vehicle to generate long term sustainable wealth.