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How Professional Traders Differ From Amateurs

Posted By Barry Ritholtz On May 14, 2006 @ 12:51 pm In Apprenticed Investor,Investing,Psychology | Comments Disabled

Two weeks ago, we discussed How Experts Differ from Novices [1] (in the ways people learn).

Along very similar lines, Brett Steenbarger looks at the differences between how How Professional Traders Differ From Amateurs [2]  [3].

This is quite instructive along several lines of thought:  1) the development of expertise (which I refered to in the "Zen of Trading [4]"), as well as the decision making process investors and traders engage in.

Here are the 5 keys according to Dr. Steenbarger: 

1) Resources – These professionals had a wealth of analytic resources
at their fingertips–and they used these resources. They had a keen eye
for how their market should be priced and took advantage of occasions
when it moved from that benchmark.

2) Information Networks – The
pros knew other pros and constantly talked with them to find out what
was going on in the marketplace. This network was an important edge for
many of the traders.

3) Strategy – Every trader I talked with
could enunciate his or her specific edge in the marketplace and, in
some fashion, could quantify that. I could not find a pure gut trader
in the bunch.

4) Adaptation – Each of the pros knew details of
his or her P/L, but also detailed trading statistics such as Sharpe
ratios. When the stats veered off course, they were quick to make

5) Complexity – The professional traders employed
complex trading strategies that relied on trading different instruments
and timeframes, all to exploit a single idea. Many of these strategies
involved hedges that managed risk, even as they aggressively pursued
their ideas. The idea of buying/selling a single thing and exiting it
never arose in my conversations with them.

For those of you interested in Behavioral Economics, or the related psychology behind trading, check out  Dr. Steenbarger’s site TraderFeed [5].

Fascinating stuff, Doc. Thanks!

UPDATE:  May 15, 2006  6:57am

Freakonomics authors Stephan Dubner and Steven Levitt look at expertise; It turns out that experts are not born, they are made [6].


How Professional Traders Differ From Amateurs [2]
Brett Steenbarger
TraderFeed, Saturday, April 29, 2006

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/05/how-professional-traders-differ-from-amateurs/

URLs in this post:

[1] How Experts Differ from Novices: http://bigpicture.typepad.com/comments/2006/04/how_people_lear.html

[2] How Professional Traders Differ From Amateurs: http://traderfeed.blogspot.com/2006/04/how-professional-traders-differ-from.html

[3]  : http://traderfeed.blogspot.com/2006/04/five-defining-features-of-market-pros.html

[4] Zen of Trading: http://www.thestreet.com/comment/barryritholtz/10226021.html

[5] TraderFeed: http://traderfeed.blogspot.com/

[6] It turns out that experts are not born, they are made: http://www.nytimes.com/2006/05/07/magazine/07wwln_freak.html?ei=5090&en=2cf57fe91bdd490f&ex=1304654400&partner=rssuserland&emc=rss&pagewanted=all

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