Pro vs individual Traders
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Individual traders often suffer from comparison with pro traders. However, between the two, the difference is simply based on a few specifics.
A Pro trader is defined as someone who lives off trading or who works in a company whose core business is trading (banks and hedge funds, etc.). Individuals and especially novice traders often tend to worship the pros. They have the image of traders who manage to understand the market, who manage to decipher it, to anticipate all movements and who are big winners in their trading.
When I talk about professional traders, they should not be confused with the coders who participate in the development of trading algorithms. That is then a question of high-frequency trading. What makes these algorithms powerful is not their understanding of the market but simply the speed of the servers (for processing information and placing orders). High frequency traders only benefit from market imbalance through the study of the order book and the exploitation of Bloomberg data.
Concerning real professional traders, those who do manual trading (which sometimes is automated), it is important not to believe that they are geniuses with a supernatural power of understanding the market. On the one hand, a large proportion of them lose in their trading. The pros are specialists in number manipulation and marketing. Admittedly, most of them manage to outperform the market (or generate good performance) over a given period of time, but if we look over several years, we notice that few of them are really winners.
In evidence, according to a Morningstar study conducted on more than 750 actively managed funds, only 40% outperformed their benchmark index over the last 5 years and this does not include management fees. When including them, the figure must be between 30 and 35% (1/3 of winners).
Unfortunately, no real study has been done on the number of individual traders who lose on the stock markets. This could have allowed for a comparison to be made with pro traders. Generally speaking, if no numbers are released, they are not good. The AMF hides well from disclosing this kind of data, there is too much money at stake.
On the other hand, there is data on Forex. Although there is often talk of 9/10 of losing traders in this market, this figure is false. That's what I show in my study on real Forex/CFD statistics. The real figure is around 25%. To be able to compare these figures with professional traders, let's take the data from Interactive Brokers (the broker for professionals) the official broker for hedge funds (futures and Forex). Each quarter it must publish its percentage of winning traders to its regulatory authority the NFA. The figure hovers around 44%.
More than one pro trader out of 2 is thus losing on Forex and on the Stock Exchange there is only 1/3 who outperform the market. It's certainly better than private traders, but there's not such a big gap either!
Individuals often mistakenly believe that pro traders use complex trading strategies, that they use tools to which they do not have access. Bloomberg is certainly a mine of information from a fundamental point of view but at the level of technical analysis, individuals have access to the same trading tools.
Like most private individuals, professional traders use moving averages, main technical indicators (IHRthe MACD, the Bollinger Bands, etc.), chart patterns, resistors and supports,Japanese candlesticks, etc. Those who do scalping mainly use the order book.
Two elements differentiate pro traders from individual traders
- experience: professional traders have all been on the financial markets for many years and have therefore acquired experience of the financial markets and the use of different trading tools. Private individuals can also acquire this experience, they simply need to accept that learning to trade is a long process. But after several years, I can tell you that pro traders are not technically stronger than the most assiduous individuals in their trading training.
- Money management: Pro traders know that their capital is their working tool and that it is therefore necessary to protect it with good risk management. If they lose the capital entrusted to them, the pros lose their jobs, so it is easier for them to yield to many money management rules.
Unfortunately, individual traders often think about gains before they think about losses. This is the case for almost all beginners who take the financial markets for a casino and not for a long-term investment. In fact, they are the ones who fill the statistics with the number of losing individual traders.
All individual traders can reach the same level as pro traders, they just have to accept that they need to spend several years to gain experience and apply rigorous money management.
With a lot of professional traders, the pro traders are only there because they have contacts or a lot of money to invest. Otherwise, they're people like you and me. If you remove individual traders taking the markets for a casino, from the statistics, no doubt the remaining individual traders would have about the same success rate as the pro traders.
Pro traders, not so pro
A Pro trader is defined as someone who lives off trading or who works in a company whose core business is trading (banks and hedge funds, etc.). Individuals and especially novice traders often tend to worship the pros. They have the image of traders who manage to understand the market, who manage to decipher it, to anticipate all movements and who are big winners in their trading.
When I talk about professional traders, they should not be confused with the coders who participate in the development of trading algorithms. That is then a question of high-frequency trading. What makes these algorithms powerful is not their understanding of the market but simply the speed of the servers (for processing information and placing orders). High frequency traders only benefit from market imbalance through the study of the order book and the exploitation of Bloomberg data.
Concerning real professional traders, those who do manual trading (which sometimes is automated), it is important not to believe that they are geniuses with a supernatural power of understanding the market. On the one hand, a large proportion of them lose in their trading. The pros are specialists in number manipulation and marketing. Admittedly, most of them manage to outperform the market (or generate good performance) over a given period of time, but if we look over several years, we notice that few of them are really winners.
In evidence, according to a Morningstar study conducted on more than 750 actively managed funds, only 40% outperformed their benchmark index over the last 5 years and this does not include management fees. When including them, the figure must be between 30 and 35% (1/3 of winners).
Unfortunately, no real study has been done on the number of individual traders who lose on the stock markets. This could have allowed for a comparison to be made with pro traders. Generally speaking, if no numbers are released, they are not good. The AMF hides well from disclosing this kind of data, there is too much money at stake.
On the other hand, there is data on Forex. Although there is often talk of 9/10 of losing traders in this market, this figure is false. That's what I show in my study on real Forex/CFD statistics. The real figure is around 25%. To be able to compare these figures with professional traders, let's take the data from Interactive Brokers (the broker for professionals) the official broker for hedge funds (futures and Forex). Each quarter it must publish its percentage of winning traders to its regulatory authority the NFA. The figure hovers around 44%.
More than one pro trader out of 2 is thus losing on Forex and on the Stock Exchange there is only 1/3 who outperform the market. It's certainly better than private traders, but there's not such a big gap either!
What is the difference between a pro and an individualtrader?
Individuals often mistakenly believe that pro traders use complex trading strategies, that they use tools to which they do not have access. Bloomberg is certainly a mine of information from a fundamental point of view but at the level of technical analysis, individuals have access to the same trading tools.
Like most private individuals, professional traders use moving averages, main technical indicators (IHRthe MACD, the Bollinger Bands, etc.), chart patterns, resistors and supports,Japanese candlesticks, etc. Those who do scalping mainly use the order book.
Two elements differentiate pro traders from individual traders
- experience: professional traders have all been on the financial markets for many years and have therefore acquired experience of the financial markets and the use of different trading tools. Private individuals can also acquire this experience, they simply need to accept that learning to trade is a long process. But after several years, I can tell you that pro traders are not technically stronger than the most assiduous individuals in their trading training.
- Money management: Pro traders know that their capital is their working tool and that it is therefore necessary to protect it with good risk management. If they lose the capital entrusted to them, the pros lose their jobs, so it is easier for them to yield to many money management rules.
Unfortunately, individual traders often think about gains before they think about losses. This is the case for almost all beginners who take the financial markets for a casino and not for a long-term investment. In fact, they are the ones who fill the statistics with the number of losing individual traders.
Conclusion
All individual traders can reach the same level as pro traders, they just have to accept that they need to spend several years to gain experience and apply rigorous money management.
With a lot of professional traders, the pro traders are only there because they have contacts or a lot of money to invest. Otherwise, they're people like you and me. If you remove individual traders taking the markets for a casino, from the statistics, no doubt the remaining individual traders would have about the same success rate as the pro traders.
