Professional vs. Amateur Traders – What Pros Know That Amateurs Don’t

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Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
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What separates professional traders from amateur traders?

What do they know or what traits do they share?

Let’s take a look.

1) Risk Management

Professionals have a strong understanding of risk management principles and techniques, such as position sizing, cost-effective use of options, and portfolio diversification.

They tend to think of having a certain structure to the portfolio that creates balance between defense and aggression, so that the risk of unacceptable outcomes is nil while still having the upside.

These are important for long-term survival in the markets.

Pros know that protecting yourself and limiting drawdowns is #1.

They have strict, calculated risk parameters for every trade and never risk more than they can afford to lose.

Comparatively, amateurs might risk excessively on single trades, leading to quick blowouts.

 

2) Psychological Discipline

Professional traders have developed the emotional discipline and control necessary to execute trades according to their predetermined plan, without being swayed by fear, greed, or other emotional biases.

Professionals follow their trading plans religiously. They have well-defined entry and exit points, and they don’t deviate even when the market seems tempting.

Amateurs often abandon their original plan, reacting to short-term noise.

They often let their emotions guide their choices, which leads to mistakes like chasing losses or cutting winning trades too early.

 

3) Adaptability

While disciplined, pros understand that the market isn’t static.

They adjust their strategies or tactics as conditions change, learning from past trades and staying sharp.

They progressively iterate on things that already work – strategies that have an established track record and they understand deeply why it works.

Amateurs can be overly rigid or too quick to jump between strategies at random.

 

4) Realistic Expectations

Pros know trading is a long game, even if the trading frequency is high for their particular style.

They work consistently over time to build wealth, avoiding the get-rich-quick mentality that traps many beginners.

 

5) Market Dynamics

Professionals have an understanding of market dynamics, including order flow, liquidity, and the impact of news and events on various asset classes and trading instruments.

 

6) Technical and Fundamental Analysis

While amateurs often rely heavily on technical analysis alone, professionals have a more balanced approach, incorporating many different forms of analysis focusing on the cause-effect mechanics of what they’re doing and effectively triangulating among them to make quality trading decisions.

 

7) Trading Systems and Strategies

Professional traders have developed and rigorously tested their own proprietary trading systems and strategies, tailored to their specific risk profile and market expertise.

These provide frameworks and rules, and helps to remove the guesswork from their decisions.

 

8) Edge

Pro traders work to identify a specific edge in the market – a statistical, knowledge, information, or pattern-based advantage that sustainably gives them slightly better odds.

Amateurs often lack this focused approach.

 

9) Trade Execution

Professionals understand the nuances of order types, routing, and execution strategies.

This enables them to achieve better trade entry and exit prices.

 

10) Market Microstructure

Professional who trade on shorter timeframes have an understanding of market microstructure, including the roles of various market participants, such as market makers, high-frequency traders, and their impact on liquidity and price discovery.

 

11) Ongoing Education

Professionals are committed to ongoing education and staying up-to-date with the latest developments in trading technologies, strategies, and market dynamics.

 

12) Patience and Discipline

Perhaps most importantly, professional traders have developed the patience and discipline to stick to their trading plan, even during periods of drawdowns or market volatility.

This is often a significant challenge for amateur traders.

There’s variance in trading and even perfectly good strategies go through elongated periods of underperformance.

 

13) Network and Relationships

Market Insights

Professionals often have better access to market insights through a network of relationships with other traders, analysts, and industry professionals.

Information Flow

Pros may have access to faster or more detailed information flows, which can be very important for making informed decisions quickly.

 

14) Financial and Economic Understanding

Broader Financial Knowledge

Professionals usually have a deeper understanding of broader financial markets and economic indicators, which can influence trading decisions.

Global Perspective

Pros tend to consider global economic conditions and their potential impact on markets, which amateurs might overlook.

Recognition of Variance

Pros know that down days/weeks/month/quarters and even years is part of many strategies.

They know that random wiggles in P/L is just noise and understand that what they’re doing will work long-term if they’ve put in the proper research and stress-testing ahead of time.

 

15) Use of Technology

Advanced Tools

Professionals use advanced trading platforms, analytics tools, and algorithms to help in decision-making and execution.

Automation and AI

Pros may incorporate elements of automation and artificial intelligence to optimize their trading strategies and execution, or to simply build leverage in their operations.

 

16) Record Keeping and Analysis

Detailed Record Keeping

Professionals keep detailed records of their trades and regularly review these to analyze performance and improve strategies.

Quantitative Analysis

Pros use quantitative methods to analyze market trends and trading performance, often developing/using sophisticated models to predict market movements.

Find Something That Works, Then Iterate or Add as Necessary

Find one thing that works.

Focus on that until you get there.

Once you find something that works, iterate off of it or add.

 

Regulatory Compliance

Professionals are well-versed in the legal and regulatory requirements of trading, making sure that their activities are compliant and ethical.

Understanding the legal implications of trading decisions, including insider trading laws and market manipulation regulations.

 

18) Personal Traits and Lifestyle

Stress Management

Trading can be isolating and lead to inconsistent results.

Professionals have developed methods for managing the high stress of trading, making sure it doesn’t affect their decision-making or health.

Balanced Lifestyle

Pros often emphasize the importance of a balanced lifestyle, including exercise, hobbies, and time off, to maintain peak performance in trading.

 

19) Mentoring and Community

Mentorship

Many professionals have mentors or coaches who provide guidance, perspective, and accountability.

Trading Community

Participation in trading communities or forums can provide support, insights, and shared learning opportunities.

 

20) Continuous Improvement

Iterative Learning Process

Professionals view trading as an iterative learning process where constant improvement is key.

There’s never something that can’t be improved.

Adaptation to Failures

Pros are adept at learning from failures, and view them as opportunities to refine their strategies and approaches.

 

How Can Amateurs Become More Like Pros?

Education

Invest in trading courses, books, and reliable resources to build your knowledge.

Develop a Trading Plan

Create a comprehensive plan that details your strategy, risk-management rules, entry/exit criteria, and position sizing.

Control Emotions

Not easy for everyone since we all have different psychological dispositions.

But if you’re a trader – or running any type of business – having more of a centered personality type can be helpful for dealing with all of the ups and downs.

Practicing mindfulness techniques or consult a trading psychologist to help cultivate emotional control.

Demo Trade

Hone your skills with a demo account using fake money before risking real capital.

If demo accounts are too limiting, try to trade with very small amounts of capital you can afford to lose.

Experience and Commitment to Improving

Experience and commitment to continuous learning and improvement are essential for successful trading.