The Difference Between an Amateur Trader and a Professional Trader

Last Updated on August 23, 2020

The sad fact is that the vast majority of what I’d call the newbies are lured into trading by newsletter writers, chart sellers, and others who portray trading in stocks or commodities as a sure thing.

This kind of trading is anything but a sure thing! 

It is more of a sure loss! In my view, trading in financial instruments has so many variables and unknowns that the odds against amateurs are about the same as betting at a casino. Even if you manage to win a few bets, the inclination is to keep playing until you lose it all.

First of all, many professional traders, unless they are closely watched by risk managers, after a few winning gambles, succumb to the belief that they are invincible. 

Then they trade until they bankrupt their employers. It has happened many times. The venerable Baring Bank was sunk in a week by such a “rogue trader” after hundreds of years of existence.

Thus, you may well ask, how do outfits like Goldman Sachs do a lot of trading that is highly profitable year after year? 

One senior trader told me how it was done. No risks. No big secrets; many different techniques. One was arbitrage deals. 

For instance, certain convertible bonds were selling for a few cents less than their convertible equivalents.

An amateur couldn’t make any money even with this knowledge. Why? Because transaction costs would eat up any profits. But Goldman could commit $100 million to a deal, to make 0.05% in a second then move on to another deal.

Another common Goldman trade was finding a stock or commodity selling for “asking” 100. There were pending bid orders for 99. Goldman bids 99.5 on a huge bulk order only after being sure the sellers will accept it. 

At the same time, the same trader has an oral deal pending to sell for 99.6.

Not a huge profit, but the daily small trades can add up to 100% a year or more in case you don’t get it, a big-time operator can make hundreds of small “sure” deals a day while an amateur can’t even cover costs on the same deals with an only few hundred thousand dollars in play.

Goldman and the big outfits pay no commissions. 

The amateur will lose any small profits and more in transaction costs. This is the difference between an amateur trader and a Wall Street trader.