What does a Professional Trader actually do?
You'll get tons of people in the industry showing or trying to convince you that professional traders try and approach the markets a particular way; when in fact, the don't.
There is a lot of mis information out there today--so what is the difference between a Professional Trader and a Retail Trader.
First, the professional trader trades for profits long/short 1-3 months. The Retail Trader trades for directional day-trading. And what is the approach to Risk? The Professional trader trades to protect their portfolio, and real diversity and proper risk management is the key. In the professional trader's world, the thing you always ask yourself is--what is the Risk? What can I win or lose in one day? For the retail trader, risk is extremely concentrated. Concentrated on 2, 3 maybe even only 4 positions with typically no diversity usually ending either up on the day--or down.
And what is the approach to return? Professional Traders trade for long term consistent returns because the goal of the Professional Trader is to get additional funds in management. No one will invest in the Professional Trader who is up 10% one month, and then down 10% the next. You need a STRONG track record, and recognizable behavior in good times and in bad. What is good behavior? When your winning, you add to your winning positions, and when your losing, you limit risk, and reduce positions. Those of you who know me personally know that I always start small, and ADD ADD ADD on the winning trades--I preach this all the time, and if you can show this strategy for several years, it will be MUCH easier trying to pitch someone to invest $10 million in your hedge fund.
The retail trader.....up massively one month, the next--looses everything. What is the outcome? For the professional trader, its all about capital preservation and growth, higher fees and bigger bonuses. What is the outcome for the retail trader, funds generally go to $0, and the retail trader tries again next year.
The professional trader trades to ensure a basic salary whereas the retail trader trades for EXTRA income. So, if you open your account with $100,000 and even if your good, you'll still have $100,000 because your taking a salary. In terms of growth, professional traders will add when winning, and reduce when losing. The retail trader, takes profit when winning and seeking more risk when losing. What is the result? The hedge fund manager grow their assets under management and the retail traders account goes to $0.
The difference comes down to the fact that ALL professional traders seek consistent compounded returns.
If you open your account with $16,000 USD and you get a 25% return per year, or 2% per month on average when do you get to $1,000,000. Einstein called compound math the eighth wonder of the world. You get to $1,000,000 by the end of year 7. One thing is guaranteed thou, the retail trader, who takes $1,000 profit per month, you'll still be at $16,000--or worse, $0. You have two choices, trade like the Professional Trader and reinvest your profits, or keep trading like a retail trader and taking profits along the way.
So why does the retail trader lose money? Because they do the exact opposite from what the Professional trader does, in every way. Start understanding the fundamentals of asset management, and you too can be a successful fund manager.