10 Lessons to Learn From Professional Trading Strategies

Roberto Rivero

Writing about professional trading strategies isn’t straightforward. One reason is that there are many different types of professional traders, each with their own professional trading strategies.

In this article we will take a look at the different types of professional traders and then take a look at what you can learn from them when forming your own trading strategy.

Types of Professional Trader 

There are many different types of traders, specialising in different strategies, with different time horizons, and trading in different asset classes. In this article, we will group them all into three categories:

  • Implementers - Traders of other people’s ideas
  • Reactors - Traders who monitor a handful of instruments and react to events and to other traders
  • Autonomous - Traders trading their own ideas.

Let’s look at each of those types in more detail.

Implementers - Traders of Other People’s Ideas

At large fund management firms, the decision of what to buy or sell is made, not by a trader, but by one or a group of fund managers. Fund managers also decide how big each particular investment will be.

It is then the job of a professional trader to execute that order, to buy or sell in a reasonable time period (often before the end of the day) at the best price possible.

Executing other people’s orders may not seem like a very skilled job but when there is a lot of money at stake, it pays to employ skilled traders capable of executing professional trading strategies. Let’s look at a hypothetical example.

At the time of writing, Warren Buffett’s Berkshire Hathaway owns 9.32% of Coca-Cola and the fizzy drinks company has a market capitalization of $228bn, making Buffett’s position worth more than $21bn! Deciding to sell just a fraction of this could result in an order worth several hundred million dollars.

Depicted: Admirals MetaTrader 5 - The Coca-Cola Co. Daily Chart. Date Range: 27 May 2016 - 2 March 2021. Date Captured: 3 March 2021. Past performance is not necessarily an indication of future performance.

Executing an order this large will tend to move the market price against you; in this case, push the price downwards through an increased supply of shares in the market, whilst you are trying to sell. This reduces the value of your trade and your profit. 

Very importantly, that market movement would be much worse if anyone worked out what you are trying to do (see the next category of trader).

Therefore, the trader’s job here is to execute the order as quickly as possible with as little price disturbance as possible before anyone works out what they are doing.

To see what can be at stake, let’s assume our Coca-Cola trade is worth $210m (<1% of Buffett’s holding). You can then see that for every 1% the price moves against you, you lose $2.1m - so, well worth paying for someone capable of executing professional trading strategies.

Reactors - Traders Who Monitor a Handful of Instruments

Our second group of traders limits themselves to watching a handful of instruments. Twenty years ago that number would have been limited to between 8 and 12 but with more sophisticated trading systems available, the number today could be as high as 30 or 40. It could be, for example, to track shares in the oil & gas sector and companies supplying the sector.

There are two reasons why traders may want to watch a limited number of instruments. 

First, they might be market makers. Market makers commit to always offering a price that people can buy at and a price that people can sell at. That way, other market participants are assured there will be liquidity available whenever they need it.

In many exchanges, market makers get fees or special privileges from the exchange. They also make a profit from the spread, the difference between the buy and the sell prices.

Because market makers are constantly exposed, they need to be right on top of the market. They need to watch the order flow coming into their stocks and they need to be alert to any news likely to move the market. Then they need to react appropriately.

The second reason why some professional traders limit themselves to watching a limited number of instruments is simply to spot and react to trading opportunities. They will be on the lookout for scheduled or unscheduled news and events that affect their patch and any unusual trading activity.

For example, they will be on the prowl for traders like the one in our Coca-Cola example in the previous section. And when they find them, they will position themselves accordingly - shorting Coca-Cola in this particular example, to make a quick and relatively low-risk profit.

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Autonomous - Traders of Their Own Ideas

In his book ‘The Greatest Trade Ever’, Gregory Zuckerman describes how the hedge fund manager John Paulson made around $20bn from one insight. This is probably the best published description of how professional trading strategies in this category are developed and executed.

The story is told from the point of view of an analyst working for Paulson who, in 2005, had the insight that US house prices were due for a correction and that many banks had made questionable mortgage loans to people who would have trouble paying them back.

After he took the idea to Paulson, a small team was deployed to look into it further. They looked at US house price history, what states and regions might be most overvalued, which banks were most exposed and which instruments would be most profitable to short if those banks were to stumble. They looked at the historic relationship between house prices and Gross Domestic Product (GDP) and estimated what would happen to GDP.

After much deliberation and analysis they decided to execute their plan, shorting bank shares and also bonds and derivatives based on risky mortgages. 

When US house prices fell by 30% in 2007 they made their profit.

The takeaway of the story is that professional trading strategies are not just hunches; they are well researched, debated and analysed from many different angles - in this case, the value of houses, the state of the economy, the lending data, bank lending policies, etc.

Professional trading strategies are also hotly debated. Traders discuss their ideas and look for people who will disagree with them because they want to ensure they have not missed any angles.

Research will lead to insights and insights will lead to a hypothesis, in this case: house prices will fall. Then professional traders will ask themselves “if my hypothesis is correct, what will that do to the rest of the world? What instruments will rise? Which will fall?” They are like chess players, trying to think two or three moves ahead.

What Can We Learn From Professional Trading Strategies?

As you can imagine, each of the above types of trader goes about their job in a very different way. However, there are lessons we can learn from their professional trading strategies to help us with our own performance. Here’s our summary:

1. Focus

All three of our trader types focus. They don’t try to be everywhere at the same time, they do less but to do it better.

In our Coca-Cola example, many of us would have tried to execute that trade whilst keeping an eye on the Forex market; or tried to execute it as quickly as possible so we could get on with something else. But a professional trader would probably spend two whole days executing that one large order and little else, breaking it up into smaller trades, less likely to move the market and to be spotted by other traders.

2. Learn the Dynamics of Your Markets

Because they focus, professional traders, especially Reactors, learn the dynamics of the markets they are trading in: what are the busy and less busy times, what size are the typical orders, what’s the total trading volume on a typical day, etc. 

If you want to trade a Coca-Cola-sized position without moving the prices, you will be better off trading at busy times. On the other hand, if you want to move the market, then illiquid times of the day are best - but you have to know when those are. For Reactors, it would be impossible to spot out of the ordinary events if they don’t know what “ordinary” looks like.

3. Manage Your Emotions

All traders have bad days, as well as good days. Professional traders know this - and they know the worst thing they can do when they are having a bad day is to get upset or discouraged. Equally, they know it’s dangerous to get carried away with enthusiasm when having a good day.

You will have good and bad days. Deal with it now – before you start. Don’t let your feelings catch you by surprise and hijack your thinking.

4. Know When to Be Patient

In our Coca-Cola example, the trader could well spend several days executing that one order. Many people’s instinct would be to get something like this done quickly but this is one time when speed would work against you.

5. Plan For Different Scenarios

For pre-timed events like company results or GDP announcements, professional traders will have thought through their potential reaction to various scenarios and will have a Plan A, Plan B, Plan C, etc. thought out beforehand. They will probably have these orders pre-loaded on to their trading systems so that they can react quickly when the time comes and beat the rest of the market.

6. Analyse Trades From Different Angles

Professional traders consider macro and micro factors. They will look at the economy, the sector, the company. They’ll look at the fundamentals and the technical analysis. They will look at the order flow on their particular instrument, the price chart, the newsflow, etc. And the more of these factors that are looking favourable, the more likely they are to pull their trigger.

7. Try to Think 3-4 Steps Ahead

As we saw in the Autonomous Trader example, professional traders think 3-4 moves ahead. If there is a report in the newspaper today about company X doing well, they don’t just rush and buy the share, they stop and think about the second or third order effects - the impact of this piece of news.

8. Implement Risk Management

All professional traders implement well thought-through risk management rules. Read more about how to do this in our other article; ‘Top 10 Forex Risk Management Tips’.

9. Look For Hedging Opportunities

Professional traders hedge their trades whenever they can whenever they can.

Let’s say that you’ve done your analysis and come to the conclusion that Royal Dutch Shell is undervalued. They recently appointed a new CEO, unveiled a new strategy and you think it’s only a matter of time before the rest of the market sees what you are seeing. 

If you simply go long on Shell, you are open to a number of risks, other than Shell’s performance and your view that they are undervalued. But let’s say that, as well as going long on Shell, you also short BP. Now you’ve protected yourself from any unexpected movements in the whole stock market, or in the oil price.

When you remove risk in this way, you can afford to take a bigger position in Shell.

10. Never Stop Learning

Finally, professional traders never stop learning. They always try to learn from their good and bad experiences, from talking to other traders and by reading. That way they are in a great position to refine and improve their professional trading strategies.

Final Thoughts

As you’ve seen from the above, there is much to learn from professional trading strategies. Whilst the job of professional traders can appear to be very different, it is worth taking the time to learn about them and to apply those learnings to your own trading strategies.

Regardless of whether you are a professional or a beginner trader, it is always recommendable to practice any new strategies on a demo account before heading to the live markets, luckily for you, with Admirals, you can do just that.

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Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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