Short term “day trading” versus longer term time horizons

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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.

Final thought

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!

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