What is the Difference Between a Good Trader and a Great Trader?

Every Tuesday Chuck releases a new Trader Tip video on YouTube. This week we will discuss: What is the difference between the guy who makes a living and the person they write the books about? The biggest difference between a good trader and a great trader, it's not how smart they are. It's not how great their technology is. It's not how much money they have. It's not who they know, it's not their infrastructure. The difference between these two traders might be different than what you expect.

You can read the episode transcript below or watch the video that follows.
If you have any questions, please reach out to us. We look forward to being a continued part of your trading education!

Today we’re going to talk about what is the difference between a good trader and a great trader. Many people often wonder about this. What is the difference between the guy who makes a living and the person they write the books about? The difference between these two traders might be different than what you expect.

First of all, the biggest difference between a good trader and a great trader, it’s not how smart they are. It’s not how great their technology is. It’s not how much money they have. It’s not who they know, it’s not their infrastructure. It is really about their psychological mindset. That is the difference. The good trader goes for decent-sized wins and a higher win rate. The great trader goes after really big wins.

Let me share a story with you.

Many of you know George Soros, George Soros might be the most famous trader of all time. There’s a guy named Stanley Druckenmiller who used to work for George Soros. Stanley Druckenmiller is one of the wealthiest men in the United States multi-billionaire, brilliant trader. One of the things that George Soros did is he tried to have people come in and work under him to reduce his burden in trading and managing money. So George is very interested in Stanley and so he recruited Stanley to come trade for him but initially, Stanley said, No, I love what I’m doing on my own. I don’t have any interest. But George persisted in pursuing Stanley over several years, and finally he convinced Stanley to join him.

Stanley said, When I made the commitment to join George, I was so excited because here I was, I was getting to go work side by side with one of the greatest traders of this generation and I was so excited for everything that I was going to learn from George. He said, I got there, and I started working with George and it was really interesting because very quickly, I started to realize like, wow, my model is as good as George’s is, and this technique I use is as good as George’s, maybe even better. I went there thinking that George was a genius, that he had these mystical techniques and these mystical models that I was going to upgrade my knowledge and my skill. But he said quickly, he realized that George’s stuff was about the same as Stanley’s. He actually was kind of disappointed.

So what was the difference?

Stanley said that he quickly started to see the difference when he would have a trade idea. And so he started to put a trade on and George would come sit down next to him and say, so tell me what do you think it’s Stanley? And he’s like, why I like this trade here where we’re getting long the end. He says okay, so Stanley would explain his thesis and Georgia say I really like it. Why are you doing it so small? And Stanley would be What do you mean? He goes the position is way too small. You need to do it bigger. Stanley’s like, okay. He’s like, Look if you want to make money on the idea, you got to put money behind it. You got to make the bet. And early on, and sometimes when Stanley was reluctant to do that, George quietly walk out of the room, go in his office and start buying it himself. Stanley said that the greatest thing that he learned from George was not George’s models, not George’s techniques. It was the ability to trade big when you had your best ideas. He said George was brilliant at trading big when his best ideas came along and turning these into really big trades that made a substantial impact on the performance of the portfolio for the year.

Now, if we bring this back to now, to this point, when I go through and I work with traders, and I’ve worked with hundreds and hundreds of traders, where I go through and I look at their p&l distributions and I look at their trades. One of the things you’ll see is the difference between a trader who makes 100,000 a year and a million a year or a million a year, and 10 million a year is the size of their winners.

That is the difference.

A really simple rule of thumb is you can take all your trades and rank them from your biggest winner to your worst trade, and then go take the top 10% of that sample. Add up the p&l of the top 10 trades and what you’ll find is that oftentimes that p&l will equal your total trading p&l. So think about that for a second. Your top 10% of your trades are your p&l. That means that 90% of your trades, 90% of your effort are for zero, breakeven. So if I look at the top 10% of a good trader versus the top 10% of a great trader, the great trader’s top 10% of trades will be much bigger than a good trader, and why is that? Because the great trader gets much bigger wins. And to do that, we have to have the mindset.

So the good trader is oftentimes always thinking about why I’m up $5,000 on this trade, and I don’t want to give it back. So they do things to try and make sure they protect the money they’ve made. The great trader on the other hand, when they’re out $5,000 they’re like, “I’m getting great feedback on this trade, and this might be one of those trades that’s gonna make my month, make my quarter, make my year”. First of all, he wouldn’t have made the trade to begin with if he didn’t believe in it. So one difference between good and great is conviction level.

Good traders take good trades. Great traders take great trades.

What does that mean? The good trader will sacrifice some quality just to take a trade and have a chance to make some money. The great trader says “no, I’m going to wait, and I’m going to wait and I’m going to wait till everything lines up and I know my opportunity is asymmetric. I know that I can make five times what I’m risking and if I can’t do that, I will not trade”.

From the beginning, the great trader is more selective than the good trader.

So that’s one thing. But then once the trades are underway, the great trader goes “I know this trade can make five times my risk, I’m up $5,000 in this. This is actually telling me I might have a good one”. So his mindset is “I’m going to hold for the five times my risk” or his mindset might be “I’m going to take the $5,000 I’m up and I’m going to spend it in a very smart, systematic way to add to my exposure and make the trade even bigger. I’m going to price my bet”.

So the good trader is taking profits, keeping his capital safe, and he gets a decent return. The great trader is holding and adding and pushing and waiting in some of these they go from 5000 back to a full loss but he’s okay with that. He’s totally fine with that. The good trader is upset oh my gosh shows up five grand I gave it back. Oh What an idiot I am. The great trader goes I know this is part of the game. Because if I’m just patient and I wait, I’m going to get paid. So some of them go bad. A lot of them may go bad, but when they work, they work and one great trade could literally make five or 10 times as much money as what the good trader made on the same idea. Same trade, same idea, same entry, maybe even the same position size.

I encourage you to go look at your trades.

First of all, better be recording your trades. If you don’t record your trades, that’s a problem. You got to start there. Record your trades, then go look at your sample and rank them biggest to smallest and look at the top 10% and see what your results are. Then challenge yourself. Go “What could I have done?” Go back and look at those individual trades that are your top 10% and go see where you got out versus what was left in the trade, and I think you’re gonna find that a lot of these trades had a lot more to pay you than what you got.

Do that analysis and I think it will blow your mind and for that, I will see you next week at Trader Tip Tuesday.

Take Care & God Bless
~Chuck Whitman