If you have the opportunity to spend time around people who have actually built a career out of trading, whether by working for a firm or starting something of their own you will notice that they all think about trading through a similar lens.
If you want to start running your book like a pro, you don’t need to reinvent the wheel. You can get started by just thinking about the game in the same way that professionals do, and that’s exactly what we are going to try and do in this article. Keep in mind, it’s going to be a pretty significant shift in mindset compared to what most traders are used to.
If you have stumbled onto this article, then you are ready for it.
Key Takeaways
- Professional Trader Mindset: Transitioning to a professional trader involves a shift towards running some core strategies that “pay the bills” combined with aggressive capitalization on high-potential trading opportunities.
- Look for the Arb: “Where is the arbitrage?” should be the first question you ask whenever something strange or unique happens. Arbitrage exploits price differences across markets, while quasi-arbitrage focuses on high-probability trades with minimal risk.
The Professional Trader Mindset
When we were first getting into the world of “serious” trading, we asked one of our mentors what the “secret” to making money was. Here is the response we received:
“Most of the time, play tight to the vest, watch your risks closely, and try to make enough to cover the overhead and live well. When you find an edge, an arbitrage, or a quasi-arbitrage, pile it on. Hit it with everything you’ve got, gear it up, borrow money to play it, and keep doing that until the arbitrage goes away, which it always does. Then spend your time looking for the next one.”
This quote really stuck with us and it’s defined the way that we have approached trading for years.
Playing Tight to the Vest
Playing tight to the vest means running simple strategies that make money, managing your risks meticulously and making consistent gains to cover your overhead. It’s about being cautious, methodical, and disciplined. This involves:
- Consistent Strategies: Stick to trading strategies that you have tested and proven to be effective (in options, VRP strategies)
- Risk Management: make sure that you know your expected drawdowns and manage your bankroll effectively.
- Low Time Requirement: These strategies should not require all of your time to run. They should be pretty straightforward.
- Overhead Management: Ensure your trading gains are sufficient to cover your operational costs and provide a steady income.
These are typically strategies that are pretty well known by the world. It’s not really alpha, it’s a clean beta that you can rely on to generate returns for providing some form of value back into the market. The type of stuff you can read in research. It’s not really In the world of options, this probably means running strategies that help you monetize the variance risk premium.
Seizing High-Potential Opportunities
When you identify a trade with a significant edge or arbitrage opportunity, it’s crucial to capitalize on it aggressively. This means:
- Leverage: Use leverage to maximize returns when there is a serious inefficiency. They don’t last long, so you need to hit it while it’s there.
- Scaling Up: Increase your position size significantly when a high-confidence trade is identified.
- Spend Your Time Looking For These: After the opportunity dissipates, diligently seek out the next one. The reason we want our “tight to the vest” strategies to be straightforward is so that while they run we can focus on finding the high potential opportunities.
These are the types of trades that would be classified as true alpha. The type of stuff you are not going to read online, and if you were to uncover something like this for yourself, you should probably not be posting it online (although you can feel free to send it to me in an email 😛 )
To get you started in thinking more this way, you can read this article on strategy development.
Understanding Arbitrage and Quasi-Arbitrage
What is an Arbitrage
Arbitrage involves exploiting price discrepancies in different markets or instruments to achieve risk-free profits. For example, if a stock is priced differently on two exchanges, a trader can buy it on the cheaper exchange and sell it on the more expensive one, pocketing the difference.
What is a Quasi-Arbitrage
Quasi-arbitrage, on the other hand, refers to trades that have a high probability of profit with minimal risk but are not completely risk-free. These opportunities arise more frequently than pure arbitrage and can be highly lucrative for traders who can identify and exploit them effectively.
Conclusion
What you have just read is the way that professionals think about trading. They do simple things that get them paid, while they spend the rest of their time looking for unique scenarios that can really push their returns to the next level.
One of the biggest things that separate professionals from everyone else is that when they find these unique situations, they really step on the gas. They leverage up and hit it big. This is actually much more intense than you would think, it’s difficult to do. But having witnessed it myself, I know that it’s the way.
Of course it’s important to really know what you are doing. There is a saying that “You either eat well or you sleep well” because when you have one of these big trades, you are spending all of your time researching it to make sure that you haven’t missed anything. You have a lot on the line and your behavior should reflect that.
And then always remember, once the opportunity is gone (it always goes away), you just go back to playing tight to the vest, and start looking for the next opportunity.
