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Trading advice from professional traders

Professional traders make their living from the financial markets, either trading their own money or that of other people. There are trading professionals in all areas of the financial markets, including forex, stocks, bonds, futures and options, and on all chart timeframes, from day traders to long-term investors.

Each trader uses different inputs to make their trading decisions and form their trade setup. Some use technical analysis while others choose fundamental analysis, others use statistics or order flow, and some use a combination of methods. To trade like a professional, some retail traders replicate their trading strategies, techniques and personality traits, the most successful of which are discussed throughout this article. This does not guarantee personal success, however, as each trader has their own trading style, personality and overall goals, and should manage their risk in accordance with this.

Retail traders vs professional traders

Professional traders often view trading as a business, whereas retail traders do not. Instead, retail traders trade with more flexibility, without a proven system or trading strategy that they follow on every trade.

This is one of the main differences between professional and retail traders: one has a system they follow meticulously, while the other doesn’t. This means that retail traders can also be successful by developing their own profitable trading systems, or by mimicking the systems of the professional.

Below, we take a look at some of the most famous investors and traders across the world, and how their methods differ in theory, practise and strategy. We have also chosen notable names to reflect the treatment of different financial markets, for example share trading, forex trading and technical analysis.

Famous investors

Warren Buffett

As of 2020, Warren Buffett is ranked in the top five richest people in the world. Born in 1930, Buffett has amassed more than $80bn in wealth through investing in companies and stocks. He doesn’t just take positions in the stock market but rather, he buys companies through his company Berkshire Hathaway, which is one of the largest holding companies in the world.

Berkshire Hathaway is a conglomerate business that owns more than 60 companies, some which are household names, such as GEICO, Duracell and Dairy Queen. It also holds large stakes in blue-chip companies such as Coca-Cola, American Express and Apple. Berkshire Hathaway stock is available to trade on many trading platforms and it is notorious for having the highest share price in the world, at its peak reaching $350,000 in November 2020.

Buffet’s investing strategy and trading decisions are based on the concepts of value investing, which was made popular by Benjamin Graham in the early 1900s. Value investors look for undervalued stock prices relative to the assets and earnings of the company. Buffett takes this a step further, factoring in the long-term growth prospects of a company. A company may look expensive on paper but, if it is growing significantly and expected to continue, then it may still be a value play.

Buffet favours companies with low debt, high profit margins, exclusive (and not easy to replicate) products, and with a high return on the shareholders’ equity, when compared to the company’s peers. These types of ratios are the main trading tools that he uses when conducting company analysis. If all of these features can be attained at a reasonable price relative to the long-term growth prospects of a company, Buffet would consider the stock worthy of investment.

Benjamin Graham

Benjamin Graham wrote the classic book The Intelligent Investor, which has widely become the handbook for value investors in stocks. He also co-wrote Security Analysis with David Dodd, which first brought to the attention of investors the importance of investing in undervalued stocks. Graham helped to introduced the concept of carrying out fundamental analysis for companies at a time when the stock market was very speculative.

Graham was born in 1894, in London, and employed Warren Buffett at Graham-Newman Corporation. This is where Buffett received his early value investing training. Graham had annual returns of approximately 20% between 1936 and 1956.

Graham’s trading plan is less concerned with growth prospects of the company, and more concerned with “margin of safety”. If a company had stable earnings that were at least slightly rising over the past decade, he would aim to buy those companies at a cheaper price. To do this, he used price/earnings ratios, never paying a multiple higher than 15 (for example, if yearly earnings are $2, the maximum share price he would buy at is $30). He also emphasised the importance of stocks that pay high-dividend yields and low debt-to-equity ratios, and stressed that portfolio diversification can help investors to increase their safety margin.

Graham also required that the company was able to pay their bills, desiring a current ratio above 2 (current assets/current liabilities). He tended to avoid investing in technology and financial stocks, as they are typically debt-driven.

Joel Greenblatt

Joel Greenblatt is a hedge fund manager and author of the bestseller The Little Book That Beats the Market. Born in 1957, Greenblatt co-runs Gotham Funds with Robert Goldstein, which places emphasis on long-term mutual funds.

Greenblatt is primarily a stock investor. The trading strategy outlined in his book requires buying and selling stocks each year. The key inputs for buying require ranking stocks according to earning yield (EBIT/enterprise value) and return on capital (EBIT/ (net fixed assets + working capital)). Enterprise value is calculated using market capitalisation as well as debt, so the stock price is factored into the equation by market capitalisation (shares outstanding x share price).

He recommends investing in the top 20 to 30 companies in the world, according to which ones rank highest in both categories, with a practise of buying a stock, selling one year later and repeating this process in order to profit from the uptrend in growth. Over a 17-year period prior to the book’s publication in 2005, the strategy had annual returns of 30.8%. Learn more about stock trading strategies.

Professional traders

George Soros

George Soros is known for being a professional trader with a personal net worth of more $8bn as of 2020. Soros’ flagship Quantum Group of Funds is a privately-owned company that trades a wide range of markets, yet he is perhaps most famous for his 1992 speculation against the British pound, which netted profits for his fund of approximately $1bn.

Soros makes highly leveraged bets, which are often short-term in nature. He believes that investors create market ups and downs with their own actions, and therefore waits until investors have pushed the price either too high or low, relative to what macroeconomic factors would suggest. This provides an ideal trade setup as the price unwinds the other way.

For example, in 1992, the British pound was artificially propped up, but Soros believed it was unsustainable. He shorted the pound and, when the artificial prop was removed, the pound fell in value, making him a particularly successful forex trader.

Bill Williams

Bill Williams lived from 1932 to 2019 and contributed to the field of technical analysis. He is well-known for the development of various technical indicators to use in trading, such as the Alligator Indicator, Fractals Indicator and Awesome Oscillator, among others. These are discussed in his Trading Chaos series of books.

The Alligator Indicator provides the overall trend, as it is based on a combination of moving averages. The Fractal Indicator marks short-term high and low points, while the Awesome Oscillator provides confirmation or warns of divergence.

These indicators can be used together or alone as part of a trading strategy, although, as discussed at the beginning of the article, clear buy-and-sell guidelines must govern all trades in order to create a trading system like those used by professional traders. Technical indicators should be used sparingly and in conjunction with other practises of technical and fundamental analysis.

Joe Kunkle

Joe Kunkle is the founder of Options Hawk, research analyst at Relativity Capital, and former equity analyst at Thomson Reuters. Kunkle primarily focuses on options and equity trading, combining options data with stock fundamentals to develop new trade ideas.

Thematic investing is a particular interest of Kunkle’s, and he focuses on investment themes that he believes could drive certain stock prices higher for years to come. He finds these opportunities by looking at options order flow, which he sees as a leading indicator for stock prices, and also scrutinising the fundamentals of the stocks that he follows.

Kunkle has created a number of thematic share baskets that traders can trade via spread bets and CFDs, two derivative products that allow you to speculate on the instruments’ price movements without taking direct ownership. Share baskets are exclusive products to CMC Markets and are similar to mutual funds or exchange traded funds (ETFs), holding multiple stocks that retail traders can trade on with lower holding costs and zero share commission fees. Example themes include fintech, direct-to-consumer products and remote working. Learn more about trading Joe Kunkle’s share baskets.

Characteristics of a successful trader

Successful traders all share a few common traits that are explained in more detail below.

  • They have their own trading system that they follow and trust.
  • They only trade when they have an advantage based on their system. If there is no advantage present, they do not trade for the sake of it.
  • They control their risk. While some use stop-losses and others get out of their trade when their thesis is proved wrong, successful traders do not become successful by taking huge losses. They cut them when they are small.
  • They are experts in a certain market or field of trading. Instead of trying to trade everything, in multiple ways, and on all chart timeframes, they stick to what they know and have expertise in.

Tools that professional traders use

Traders need tools. Ultimately, they need data, which comes in many forms, such as price, fundamental and correlation data. The list goes on. Such tools are available in trading platforms, charting software, and from private vendors.

Professionals are not limited to just investments; they can also trade derivatives like spread bets or CFDs, which allows them to speculate on quick price action and take advantage of miniscule price moves which an investor may not spot. Learn more about the differences between the two.

How to think like a professional trader

Thinking like a professional trader, often called trading psychology, requires working on the mental aspects of trading. Humans all have built-in biases, to varying degrees, which may cause us to deviate from even the most well-laid out plan.

An example of this is that we don’t enjoy loss, and tend to avoid it where possible. This can translate into holding on to losing trades too long, not wanting to realise that loss and admit it is real. Professional traders tend to cut their losses in a calculated manner.

Another bias is activity bias. This is the little voice in our brain that tells that us in order to be good traders, we need to be active. However, this is not always the case. Sometimes, it could be better to sit on our hands and let a trading profit run, or stay out when conditions are not favourable. Professional traders’ strategies tell them when to be active and also when to ease off.

To think like a professional trader, consider weaknesses in your trading, such as taking profits too early, holding losses too long, or over-trading. While some of these issues are common to many traders, each trader will struggle to varying degrees with their own issues. You should become aware of these weaknesses or flaws and subsequently find ways to limit their negative impact on your trading strategy. This is a proactive approach, as opposed to always repeating the same harmful trading and thinking patterns.