I see many people here coming out with retail mindset and phrases like “pays the bills”, “made the dinner” etc. Have a read below:
Key differences between Professional Traders and Retail TradeRS
Hi there! If you are a new or struggling trader, or are thinking about “trying it”, then I want to help you through my articles here.
First of all, I want to explore the key differences between Professional and Retail Traders, in terms of the typical trading approach and style that each adopt.
This is incredibly important because, as you may or may not know, the vast majority of Retail Traders fail. There is even a saying in the industry — 90% of Retail Traders lose 90% of their money within 90 days!
Whilst this may not be 100% statistically true or accurate, the overall message is definitely true. Because the vast majority of Retail Traders DO fail, and most of those fail badly.
Here’s the shocking truth about the trading industry:
The Retail Trading industry sells a dream to Retail Traders that is total garbage, and then teaches them to trade in a way that is designed to benefit the brokers and Professional Traders, and not you, the Retail Trader.
This is why there are so many differences seen in the approach adopted by Retail Traders, compared with how Professional Traders actually do it, and that is what I want to explore today.
Firstly, let me define what I mean by a Professional Trader — someone performing a controlled function trading other people’s money, either on a proprietary trading desk in an Investment Bank, or in a Hedge Fund.
Professional Traders do not include the guys on Twitter calling themselves “Professional Traders”. These are almost always Retail Traders simply pretending to be Professional Traders!
Retail traders are individuals who trade for and with their own personal accounts. So even if you do this “for a living”, you are still a Retail Trader, and not a Professional Trader, technically speaking at least!
Obviously there are good and bad Retail Traders, and good and bad Professional Traders, but it’s also fair to say that the vast majority of Professional Traders make money, and the vast majority of Retail Traders lose money!
So now I want to examine the key differences between them in terms of their approach and style of trading, which in turn will tell you WHY Retail Traders lose and Professional Traders win. So what NOT to do, and WHAT to do instead!
Trading for income versus trading for wealth
Retail Traders typically trade for income, as this is what they are told trading can and should be for. So if they make any money, they withdraw all their profits as an “income”, and typically then spend it.
I am NOT saying you should never withdraw from your account, or take any kind of income though. Withdrawing partial profits as a bonus and reward for good performance is a positive and healthy thing to do.
But you should not be constantly withdrawing any profits made, and the overall goal should NOT be on taking an income, but on GROWING your account and wealth.
The industry (brokers and so called trading educators) actively promote this idea of trading for income, as it makes trading attractive, therefore allowing them to get more clients.
Trading specifically for an income is a bad idea though, as it promotes the wrong psychology, increases the chances of a trader failing and blowing their account, and means they will never become wealthy from trading.
Professional Traders understand this, and so trade to grow and compound their money into wealth over the long term. For example, Hedge Funds charge management fees which are used to pay traders a salary to live off, so they do not need to withdraw from the fund.
Their goal is to trade successfully and grow the fund into a wealth bomb, and they know that trading for income will not achieve this.
So even good Retail Traders will make money from elsewhere in their life so they are not relying or “wanting” to make an income from their accounts. I worked a regular job for almost ten years whilst trading in my spare time for exactly this r
Short term “day trading” versus longer term time horizons
Retail Traders typically trade over short time horizons — using short term charts to analyse and make trading decisions from.
They will often use 5 minute, 15 minute, 1 hour and 4 hour charts to trade off. Basically “day trading” as their main or only trading strategy.
Professional Traders know this, although they won’t tell you because they don’t want you to know! Professional Traders love day traders as they provide the liquidity in the market for them to enter and exit their trades whenever they want, and at their desired price.
In light of massively reduced intra-day volatility, Professional Traders take a longer term approach to their trading, typically aiming to make money from trades over a minimum one week and maximum six month time horizon, with a “sweet spot” of one to three months.
Technical Analysis to generate ideas versus Fundamental Analysis
Retail Traders are almost always using 100% Technical Analysis in terms of how they generate ideas and make trading decisions. They believe Fundamental Analysis to be irrelevant, partly because they wrongly believe in very short term trading, whereby Fundamental Analysis IS irrelevant!
Professional Traders are always AT LEAST 50% fundamental in terms of how they generate trading ideas and make trading decisions. Many are as much as 80% fundamental.
This essentially means they primarily use Fundamental Analysis to generate trading ideas and decisions. Technical Analysis is used and respected, but as a secondary tool for timing entry into pre-conceived ideas formed by Fundamental Analysis.
Single/limited positions versus multiple position, diversified portfolios
Retail Traders will so often only have one position open at any one time, or maybe two or three at the most. This means NO or very little diversification, and increased risk.
Professional Traders typically manage multiple positions as part of a “trading portfolio”. The positions will be diverse — different asset types, long and short positions, low correlation between different assets, and so on. This reduces risk.
Short term mentality versus long term mentality
Retail Traders typically have a short term mentality to everything connected with trading, including their outlook on gains. They want to make money quickly! In doing so, they normally lose money quickly!
Their primary goal is to make money. Risk Management and protecting their trading account is normally a secondary consideration, if indeed it is a consideration at all. So instead of getting rich quick, as they want, they get poor quick!
Professional Traders have a longer term outlook in which there first goal is capital preservation, and second goal is growth. In other words, the initial and primary goal is to simply NOT lose money, or at least protect themselves from significant losses.
They will trade in a way that ensures they will NEVER have any trading “disasters”. Risk Management is at the forefront of everything they do.
Actually making money is only a secondary focus. Obviously it is an aim, an important goal, but they are not “obsessed” with it. They are more obsessed with first and foremost ensuring risk is managed correctly.
So overall, they aim to get rich slowly in a sustainable fashion. They trade in a way that will potentially allow them to trade forever, because they will never “blow up” like so many Retail Traders do.
So as you can see, there are significant differences in the overall approach and style adopted by Retail Traders and Professional Traders.
Given who normally wins and who normally loses, you don’t need me to tell you which of the two you should be looking towards as your trading role model!