Professional Traders vs. Retail Traders – The Key Differences

Traders can be broadly categorized into two groups:

• professional traders
• retail traders

While both groups seek to profit from the financial markets, the approach, resources, and strategies they use can vary significantly.

This article looks at the key differences between professional and retail traders, touching upon aspects such as knowledge, technology, help from others (e.g., analysts, employees), and more.

Basic Differences

Best practices for individual investors generally involve passively indexing to broad market indices, driven by their savings rate.

Professional investors largely deal with large, relatively fixed pools of capital providing value-additive services tied to the varied and nuanced goals of their clients.

The tactical aspect of trading is zero-sum, so you’re in a competition with sophisticated entities on the opposite side of your trades doing everything they can to get an edge.

The size of the trades also means you move the market against you and transaction costs increase in a non-linear way.

Contrary to popular belief, it’s not necessarily about beating the S&P 500 or some arbitrary index.

Doing that is one example of a financial goal, but is far from representative of the entire range of goals, needs, and motivations that people have.

Knowledge and Experience

The biggest distinction between professional and retail traders lies in their level of knowledge and experience.

Professional traders typically have formal education in finance or economics and are well-versed in market analysis, trading strategies, and risk management.

They often have years of experience working in financial institutions or trading firms, which provides them with a solid foundation to navigating markets.

In contrast, retail traders generally possess limited formal education in trading and may not have the same depth of experience.

Many retail traders are self-taught, learning through online resources, books, and trial-and-error.

Is education important?

And while learning, training, and education are very important in trading, there is no college curriculum that directly teaches you how.

There is value in learning finance, math, accounting, coding, economics, etc., and college is one place where you can learn that.

And getting into financial institutions to get on the track of being a professional trader or money manager often requires a college degree.

But while most successful traders and investors are academically skilled, being heavily formally educated is usually not overly important because you have to actually focus on markets.

The way most ultimately learn is they get knocked around in the markets and then use that experience to learn and do it differently.

Practically all successful traders and investors have had moments in their careers where they’ve made very painful mistakes that cost them a lot of money or even took them out of the game completely.

But these can also be great teaching moments and imbue a deep sense of humility and realization that what you know is small in relation to what you don’t know and can’t know.

Access to Technology and Information

Tactical trading is a game of information and there is always someone else on the other side of your trades, and they’re probably relatively sophisticated.

So, for this reason, retail traders tend to heavily lag the returns of the overall market.

Technology also has a key role in modern trading, with advanced forms of analysis and real-time information being important for success.

Professional traders often have access to the best trading platforms, sophisticated analytical software (many proprietary to their organization), and high-speed networks that enable them to make better-informed decisions and execute trades faster.

Retail traders, on the other hand, rely mostly on publicly available trading platforms, which may not offer the same level of functionality as those used by professionals.

Also, retail traders may not have access to the same depth of real-time information, which could put them at a disadvantage when making trading decisions.

Access to Trading Products

Retail traders may be limited in terms of what trading products they have access to.

For example, a retail trader may not be able to access swaps and various forms of exotic derivatives (e.g., knock-ins and knock-outs) with most brokers.

Support and Collaboration

Professional traders generally work in a team environment, surrounded by colleagues and experts who provide support, insights, and collaboration.

This network of professionals enables them to bounce ideas off one another, learn from each other’s experiences, and make better decisions.

Retail traders typically lack this support structure, often trading alone or with limited assistance from others.

While online trading communities can offer some degree of support, the level of expertise and collaboration available to retail traders is usually far less comprehensive compared to that of professional traders.

Risk Management and Capital

Professional traders are employed by financial institutions or trading firms that provide them with a substantial amount of capital to trade with.

This capital not only allows them to take larger positions but also to better manage risk by diversifying their investments.

These traders are also subject to strict risk management policies and oversight, which helps to minimize the likelihood of large losses.

Retail traders, on the other hand, are often trading with their own money and may have limited capital at their disposal.

This can lead to a higher risk of loss, as they may not have the means to diversify their investments or manage risk as effectively as professional traders.

Following this, managing larger amounts of money means professional traders have…

The Ability to Make a Living

Managing lots of money also allows professional traders to make a living.

Retail traders don’t generally have this advatange.

For example, it tends to be very difficult making a living trading $100,000.

However, even a boutique hedge fund or trading firm with $25 million AUM can usually generate single-digit millions in trading/investing profits each year.

If one trader and a small support staff, that’s generally more than enough to make a good living.

Larger hedge funds tend to make a lot off management fees alone.

For example, a hedge fund or trading firm with $10 billion in AUM with a 2% management fee is getting $200 million per year even before performance fees.

Regulation and Compliance

Professional traders are subject to a higher degree of regulation and compliance compared to retail traders.

They must adhere to the rules and guidelines set by regulatory bodies, such as the SEC or FINRA, which govern their actions and ensure ethical trading practices.

Retail traders, while still subject to certain regulations (e.g., pattern day trading), generally face fewer compliance requirements.

This can be both an advantage, allowing for greater flexibility in trading strategies, and a disadvantage, as retail traders may lack the same level of accountability and oversight as professional traders.

Flexibility

Professional and retail traders operate with vastly different levels of flexibility. 

This difference stems primarily from their roles, responsibilities, and the capital they manage. 

Professional Traders

Professional traders, often managing funds for clients or institutions, are bound by specific mandates and investment strategies.

Their clients have diverse goals, ranging from conservative, long-term growth to aggressive, high-return strategies.

This restricts their flexibility, as they must adhere to pre-defined risk tolerances and investment universes.

Deviation from these mandates can lead to client dissatisfaction and even legal repercussions.

Retail Traders

Retail traders, on the other hand, enjoy significant freedom. 

They are typically managing their own capital and are not accountable to external stakeholders. 

This allows them to adapt quickly to changing markets, explore diverse trading styles, and even take breaks from trading altogether. 

This agility can be a significant advantage in volatile markets.  

However, as we’ve covered, this freedom comes with its own set of challenges. 

Retail traders lack the resources and support systems of institutional settings, making decision-making and risk management more challenging.

FAQs – Professional Traders vs. Retail Traders

How can a retail trader gain knowledge and experience similar to a professional trader?

Retail traders can acquire knowledge and experience through various channels such as online resources (DayTrading.com being the best one, of course), online courses, books, reputable social media personalities, reputable YouTube channels, and mentorship programs.

Additionally, they should practice their trading skills through simulated trading platforms (often called paper trading) or small live accounts to gain hands-on experience.

Continuous learning, staying informed about market trends, and analyzing successful professional traders’ strategies can also help retail traders improve their skills.

What are the differences between retail and professional traders?

Trading (or investing) wisely differs greatly for individual and professional investors.

Individuals generally should prioritize consistent saving and investing in diversified index funds that track the broader market.

This strategy allows them to capture market returns over the long term without needing to actively trade or time the market.

Professional investors, on the other hand, manage vast sums of money and cater to diverse and complex client needs.

These goals may not even be dependent on returns at all – e.g., currency or interest rate hedging.

They face a highly competitive landscape where gaining an edge is difficult and expensive.

Large trades can move the market adversely, and transaction costs rise significantly.

Therefore, professional investing isn’t solely about outperforming a benchmark like the S&P 500.

Instead, success lies in aligning trading and investment strategies with specific client goals, which can range from generating income to preserving wealth to hedging, or even achieving social impact – among various others.

What can retail traders do to gain access to better technology and information?

Retail traders can start by researching and comparing different trading platforms to find one that offers advanced tools, software, and features tailored to their needs.

Additionally, they can subscribe to premium news and data services, which provide real-time information and in-depth analysis.

Joining online trading communities can also help retail traders gain access to shared resources, tools, and valuable insights from experienced traders.

How can retail traders establish a support network similar to professional traders?

Retail traders can connect with other traders and industry experts through online forums and social media platforms.

Attending conferences and workshops is another way to network with like-minded individuals and gain insights.

Participating in online trading competitions can also provide opportunities for collaboration and feedback from peers and industry professionals.

What steps can retail traders take to improve their risk management?

Retail traders should start by educating themselves on risk management principles and techniques.

This includes learning about position sizing, stop-loss orders, diversification, and portfolio rebalancing.

Developing and adhering to a well-defined trading plan that outlines risk parameters can help retail traders manage risk more effectively.

Additionally, using risk management tools and software can aid in monitoring and mitigating risks.

What are some common challenges faced by retail traders that professional traders may not encounter?

Retail traders often face challenges such as limited capital, difficulty in managing emotions, and a lack of formal training or education.

Additionally, they may struggle with balancing trading activities alongside their full-time job or other responsibilities.

Retail traders might also find it difficult to access advanced trading tools, real-time information, and professional support networks, which can impact their decision-making and overall trading performance.

Conclusion

The differences between professional and retail traders can be significant, with distinctions in knowledge, technology, support, risk management, and regulation playing a key role in shaping their trading experiences.

The biggest one is often simply the most obvious – their profession.

Retail traders often do something entirely different for a living while professional traders do it as their job and have years or decades of experience.

While professional traders have the advantage of advanced resources, a support network, and more capital, retail traders can benefit from increased flexibility and fewer compliance requirements.

It’s important for retail traders to be aware of these differences and to continuously invest in their education and skill development.