What is a Professional?

"Professional traders are merely odds makers who speculate when the odds are all in their favor."

You will find that professional trading encompasses more than just business organization. First, there is an attitude towards speculation that it is a business not a gamble, not a crap shoot. More important, it is a belief that it is a legitimate business, a profitable business, where money can be made month after month, year after year consistently, in good times or bad.

This attitude is exclusively risk oriented. The professional trader has to make money. He cannot be subjectively biased by his belief, by his value system, newspaper articles or peer-pressure. He must have an overriding concern for losses and being wrong on the direction of the market movements. Making money is never a problem, taking profits is not a problem, but a true professional specially knows how and when to take losses.

In professional trading, time horizons are much shorter. To a professional, every month is like a year, every week is like a quarter, every day is like a week. A professional will almost always make money every month. He will have an occasional losing week and he could have several losing days, but by and large if a professional starts to lose money he will stop trading. He will cut down on his trading size until he becomes profitable. I have often seen professionals who trade 1000 to 5000 shares of stock a day, who, if they start to lose money, will cut their trading in half. One professional I know, who trades often up to 5000 shares a day, if after 2 or 3 days of losing money, will cut down his positions to as small as 100 to 500 shares until he consistently starts to make money again. This is a good principle to follow, as often our own internal cycle safe detrimental to our own profitability.

It is then that our rigid discipline, our technical tools and our professional attitude towards losses, saves us. Professional traders are merely odds makers. You can never be absolutely certain, but you can speculate when the odds are all in your favor. This is the big difference between gambling at Atlantic City Casinos, and trading in the speculative markets. In gambling, you are taking a risk, in the stock market you are also taking a risk, but you are taking a risk when all the odds are in your favor. You are free to pick and choose what the trades will be, and how you want to stack the odds.The professional spends most of his time setting the odds on how he will play. He does not allow news events or peer pressure or other items to set the odds or the rules of the game far him.

When you are consistently around Wall Street, employed as a professional, day in and day out, there are many fringe benefits. The most obvious, and the one overlooked by the public is the opportunity benefit. There are times over the course of the year by just having the right of being at the Stock Exchange when an explosive move in the market gets under way, that people connected with the market will make unlimited amounts of money in a short period of time. Those people who happen to be school teachers or construction workers or in other areas of lite, do not have that, opportunity. They can only read in the papers several days later that the market was active.

A professional trader learns to recognize opportunity. When opportunity presents itself a professional will act. It is a crime to be a professional trader and see a major move underway and not do anything about it because of fear of taking a loss. A professional, usually follows the trend quite quickly and is quite happy to be stopped out of the trade at a small loss, if he is wrong.

Another characteristic of professionals is that they employ strategy. Most of the public being fundamentalists have no strategy at all. They merely think something is going to go up aver time because of some fundamental development, and everything is thrown into the pot known as long term investing. The professional trades all the time and only short term. He never trades for long term capital gains, and he is never concerned about tax consequences. Money is money, profits are profits, and you pay 10% tax or 90% tax, if you have a profit, you have more than you had the day before.

Therefore, the consideration that the professional has is how best to exploit the opportunities that present themselves. Does he want to be a Bull or a Bear? Does he want to buy the dips or sell the rallies? What is the best way and the best vehicle to employ such a strategy? Does he want to use leverage, options, futures? Does he want to pyramid? What are the active markets, stocks or commodities?
A professional cannot afford to tie up his money in idle stocks or commodities that are not moving. His cash flow must pay his bills. He cannot buy a great quality stock that is just lying dormant. He must restrict his investment activities to big movers.

Because of this, the professional has no need to catch the high or low "tick". He is merely interested in making a consistent profit in the middle. Professional trading itself is a highly specialized, disciplined activity and forecasting has nothing to do with it.

Once you make a trade, and you are in it, profit and loss is the only consideration, not the forecast. The forecast is used to set your strategy, of being a Bull or a Bear; setting the odds as to the probabilities of success, the magnitude of the success, and watching the tape activity based on that forecast, to see if the technical conditions and the tape validate the strategy.

Professional trading strategy is a lot like poker playing. Professionals are constantly watching the other players in the market, be it mutual funds, the public, well known television commentators, or any other force that has an influence on the market.

A professional will usually let the market tell him when it is time to change. He will exploit a specific strategy until he loses money. That is, he will buy a dip, day after day, after day, as long as it is profitable, and the first time he starts to lose money he will change his strategy. On the Bear side, he will short a rally. The public on the other
hand will often buy a dip once, take a quick profit, and immediately start shorting rallies. They will get confused as to the long term trend direction.

A professional trader knows that making a living in the stock market is hard work. That in reality, it is like a game, and that you must know the rules of the game. The rules are not variables. The rules say, buy or sell, you win or you lose. The idea of the game is to lose as little as possible, not to make as much as you can. If you try and make as much as you can, you are going to have large wins and large losses. The rules say, lose as little as possible and you will win consistently.

The public does not know such rules exist. The public invests far long periods of time under the accepted notion, that it is okay to lose money. It is okay to lose 20%, 30%, 40% over six months, because in the long run, the market always comes back. This is absolutely ridiculous. There is no such thing as investing over the long term unless it is profitable positions day after day, week after week, that are making money. Simply investing and holding stocks in a losing position, is just plain stupid.

Professional trading is a humbling experience. You must be capable of trading without personal pride, dignity, inability to admit defeat. Being wrong is part of the game and being wrong many, times is expected. No one can be a successful trader unless they have taken many, many losses. It is the magnitude of the losses and how quickly they are taken, which is important.

The professional trader, more than anyone else, learns from his losses, his mistakes, not his winning trades. The public only looks at their winning trades, and how successful they were, and ignore their losses out of shame. The professional studies his losses and vows never to have them repeated.

Professional trading differs from investing in many regards. To the professional trader the most important consideration is not profit or how to make money, but losses and how to avoid losing money From the professional standpoint, the trader does not care how big his gain will be, or how long it takes to get it, or if he is right or wrong. His only consideration is not losing money. To the professional trader opportunities come every day of the week. The professional is a technical trader. He knows how to read the tape, he knows how to pick stocks and there are thousands of opportunities to choose from. He is somewhat similar to a professional odds-maker in gambling. It has often been said, that the difference between gambling and speculation is that in the case of speculation , you are taking a risk when the odds are entirely in your favor.

Being a professional odds-maker, a professional trader only takes those trades when, in his judgment and assessment the market conditions, fundamentals, technical and all the tools of his trade, show the odds are probably 80% to 90% he is right in the direction of the market and the trade. However, more important, if he makes the trade, what kind of risk is involve and when he can get out of it if he is wrong, and how much money will he lose if he is wrong.

There are many times when the professional trader knows exactly what the market is going to do and will refuse to make a trade. He may know the market is going up another twenty points to an all lime high. However, if the assessment is such that in that final twenty points something could go wrong, and the market could suddenly reverse on him, the risk factor involved in being wrong or having an accident happen is far too great to make a trade, so he will let the trade go by and not trade at all. This is a consideration that entirely escapes the average person who is not used to making money on a professional basis. The average person has been duped by the large brokerage firms into accepting losses, in the belief in some distant," long term", investing horizon, where all investments eventually workout fine. Remember, the professional trader makes a living exclusively from capital gains month in, month out. He must make money every single month that he trades. He may occasionally lose money on a day to day basis, a few times a year lose money on a weekly basis, but he will rarely lose money on a monthly basis. This is due to his ability to weed out the bad trades and only trade with all the factors in his favor.

More importantly, he has an exit point that is clearly defined as to degree of risk, amount of money, and amount of time it takes him to find out if he is wrong. This is all done before he makes the trade. Many good professional traders I know will often watch the ticker tape all day long, far days on end and never make a single trade. Learning how to do nothing is a very important trait. Knowing when not to trade is often much more important than knowing when to trade.

Another factor in assessing risk versus reward is that a professional understands the amount of leverage to take on any one trade. When there is significant potential in the stock market, such as a major basing period over weeks and months, or economic conditions have suddenly changed unexpectedly to the better and the stock market breaks out of a trading range, then more leverage would be considered. This type of opportunity is immediately seized by the professional, where not only are the probabilities good far trading with the primary trend but one may use leverage, such as options and financial futures to double and triple one's normal position and get a very large profit with a reasonable amount of risk. Most other times when trading probabilities do not exist, leverage may be totally inappropriate to the professional trader who must be 80% right on the trades he picks. Being right 80% of the time, as to the direction of the market, is not an advantage if you use leverage inappropriately. A highly leveraged position that goes against you 20% of the time when you are wrong on the direction can still destroy your overall performance over the course of a year.

To a real professional trader it is usually discovered that his true rate of return is made in three or four spectacular trades during the year, when the stock market spends six weeks going in one direction, i.e.200 points. The rest of the year is spent entirely keeping out of trouble, breaking even, and a lot of small scalping trades. The opportunities for large money rewards and the use of leverage do not exist everyday. This too is a distinguishing characteristic that the professional knows how to assess but which the average public investor has no conception of .To them, the equal probability of the market going up or down any one day is the same.
They do not know that major moves only happen 2, 3, 4 times a year at most, and they do not know how to recognize major moves. The professional knows that when a major move exists, and he recognizes it, he must do something about it. For that is what being professional is all about...seizing the opportunity when it happens. This is where our knowledge of historical measured moves comes in and what normal market action is and what constitutes abnormal moves. Since there are so many opportunities in the stock market to make money, the professional trader is never emotionally attached to any one trading vehicle or stock. He learns to risk his capital in the most attractive markets. When stocks are dull and there is no hope for a major turnaround, his attention might be focused on soybeans, oil, foreign currencies or bonds, but he will always try and keep his capital employed in the most active tradable markets and avoid the quiet ones. He tries not to have a personal subjective bias to any one particular trading vehicle, such as gold. Even though he may think the long term outlook is very clear, if there is no volatility on the tape, he learns not to waste his time and his capital trading it now. The big money is made investing with the main trend, well off the lows and well before the highs. That is where most of the easy money is made by the professional.

Professionals treat stocks, commodities, options like a grocer would heads of lettuce. The produce truck comes almost every day and dumps off a major shipment. If you buy a head of lettuce, let us say for $1, you are not looking to sell it for $1.30 or $1.50, you are looking to sell it for $1.10 or $1.15 and to sell quite a few. The professional trader treats stocks this way. 1000 shares of IBM bought in the morning up 3/8 is $375.A professional might make that single trade 3 , 4, 5 times in a single day, trying to scalp out 1/4,3/8, 1/2 and may be net out $500 to $1000 every day on a 1000 share position.

For the day to day opportunities, it is always a function of the highest percentage batting average, trying to get wins of 90%, 95%. Even though they are small wins, small percentages add up tremendously when you have many, many trades. Just like the grocer who sells truckloads of lettuce, marked up at only pennies, it adds up to big money when done in volume. In the final analysis, the professional trader/odds maker has two probabilities to calculate:

1 - The probability of direction.
2 - The probability of making x amount on the vehicle he has chosen to trade the trend with.

In other words, you must be 80-90% right on the primary direction but also 80-90% right that your sale at a specific profit goes off. Being right on the move but never realizing the profit because the move wasn't big enough can be a real disaster. This is another very important distinguishing characteristic that separates the professional from the public...knowing that banking a successful trader is more important than being right!