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Thinking Like a Professional Trader

If you want to get the most out of your trading, treat it like a business. Think about the value proposition behind the time, information, and tools you use.

About a week ago I was involved in a meeting with my group manager and the guy I consider in many ways to be a trading/markets mentor. In it we were talking about how different types of market participants view information and resources. This is something I’ve spoken of before.

The average trader/investor thinks of things like price data, analyst reports, education and all the various goods and services related to trading and investing as an expense. They are always thinking first about how much something will cost and are continuously trying to get something free or on the cheap.

The professional trader/investor has a very different mindset. He asks the question how much money service or product can help them make, or help them save money through improved efficiencies and things like that. It is only after they have considered the benefit that they consider the cost. If it’s a good return on their money, the go for it.

In other words, professionals are looking at all of their decisions vis-a-vis their actions as market participants as investment decisions while the average person only looks at their actual buys and sells in the market that way. This is one of the reasons why the average trader struggles.

And lest you be tempted to say that the pros only spend money because they have it to spend, let me tell you that investment banks and trading operations can be some of the most penny pinching folks you will ever find. They are constantly looking for ways to cut costs, which means they will only spend money on stuff they know will help them make or save money in their operations. Every expenditure must have a very solid business case.

Consider this. We were talking about pricing for our analytic services – the one I currently work on and the one he current runs. His is one directed toward portfolio manager in a very customized fashion and he charges $1000+ per month for it. The one I’m on is much more immediate and real-time in nature with a target audience of institutional sell-side folks and prop traders. We charge about $300/mo per user for it. When we talked about those figures, my mentor laughed at how relatively cheap they were. He, of course, looks at it from the point of view of how much money he could make off of the information and analysis we provide the user. It is certainly well in excess of what we charge for it.

Just so you know, my mentor trades the type of size many of us aspire to reach one day. In fact, he was saying that he’s figuring on making a seven figure profit this year from his various investing and trading activities. He’s been in the business in one fashion or another since the 1970s and actually helped create the group I work for now.

Now you might be tempted to think of professional and non-professional traders in terms of whether they trade for a living or are employed to do so. That’s one way to look at it for sure. A better way, though, is to think of it in terms of their approach to trading. Professional traders treat it as a business, regardless of whether it’s their living.

If you want to get the most out of trading, treat it like a business and consider every decision to spend or not spend money on your trading as an investment decision for your business. Also remember that you generally get what you pay for – as in anything else. My mentor’s service is rated as one of the 2-3 best independent research sources out there and extremely highly regarded by its subscribers. They very happily pay what he asks because they’re getting a great service produced by a guy with 30+ years of experience.

By John

Author of The Essentials of Trading

3 replies on “Thinking Like a Professional Trader”

Hi John,

I happen to read on one of your blogs that trading for a living is different from trading for capital growth.

Would you kindly elaborate more on this remark, i.e. strategies, psychology , money management…

… and thanks for producing such a great blog!

Regards
Bryan

Perhaps part of the reason for attitudinal divide between professionals ( in the sense that trading is there primary source of income) and those who aspire with varying degrees of commitment to earn enough income from their trading to join the professionals, is their ability to evaluate the potential benefits of services and other investments in their trading education.

The trading world the neophyte faces is rife with every imaginable variety of scam, ruse, fraud, and plain rip off. As are reminded from time to time by analysts, CEOs, bankers, and the Madoffs, Thains, and Fulds of the trading world, there’s only one rule out here, and it applies to the buyer, not the seller: Caveat Emptor.

For Christ’s sake the government’s even in on the act. The major banks are all bankrupt and beyond resurrection. They don’t even have a business model anymore because securitization is dead.

Well, I may be rushing to an unjustified conclusion there, given the only reliable trend in the markets it is always possible that the government might decide to guarantee not just the existing toxic waste, but any future plutonium the banks are able to cook up. That might get lending going again.

I probably ought to send that idea to Geithner, it’ll work as well as anything else they’ve come up with.

Now that I’ve blown off a little steam I’ll resume. There is a significant contingent of the aspirant crowd who are searching for the black box secret that’s going to make them wildly successful, with little or no effort on their part.

It’s precisely that belief in some secret requiring no further effort that drives them to try to acquire it, and acquire it as cheaply as possible – free is the best price of all.

But there are others who would gladly pay a reasonable fee to learn, and who are capable and willing to put in the time required to learn. They know there’s no magic black box, and even if there were they would rather pay to find out what’s inside the box and how it works, because boxes break, or don’t work as advertised.

The cost of an investment in one’s trading education or tools is more than the price of the item. There are also the trading losses that would be incurred for something that doesn’t work, and worst of all there’s the time, the time learning, backtesting, then deploying bit by bit.

The only way to survive in this jungle is to assume everyone’s a charlatan, until proven otherwise.

I haven’t had a chance to look over your site much yet, but I think that your approach is the only way to build the minimum degree of trust required to get people who understand the value of information and are willing to pay the price, provided there’s a value for value exchange.

You’ve pretty much got to spread your wares out and let the customers handle the goods. If there’s quality there, and the customer’s got the motivation to do the work, a beautiful thing happens.

Commerce.

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