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At this stage, a professional trader is able to sustain themselves solely through trading and become a freelancer. In developed countries such as Europe and America, freelancers are generally respected because it's believed that it's not easy for someone to survive in society based solely on their own abilities. On the other hand, if you work for a large corporation, you may be more likely to generate wealth through the company's brand and platform. I worked for a large domestic bank and financial institution for six years and I remember that our bank's average output per person was around 5.8 million per year, meaning that I generated 5.8 million worth of wealth for the company in a year. However, when I left the banking system and started my own company, I realized that it's very difficult for one person to earn 5.8 million per year. In China, if you mention that you are a freelancer in social situations, you may not receive respect and may even face disapproval.
Many of my former colleagues in the trading room have become freelancers, and some have been living this lifestyle for many years, leading a somewhat reclusive life. Some may assume that traders who make a living through trading must have a significant amount of capital, but this is not always the case. According to the cost of living in Beijing, Shanghai, Guangzhou, and Shenzhen in 2015, it takes about 350,000 yuan to sustain a living through trading (assuming full responsibility for risk). Compared to investing in a coffee shop, this is a relatively small investment. Generally, freelancers don't have to worry about drawdown and liquidation of their own trading accounts, making it possible to achieve a return rate of 50% per year. However, it's important to note that a freelance trader's trading system must be short to medium-term.
Professional traders typically have their own trading system and decision-making assumptions, which sets them apart from novice traders. There are two types of trading approaches, namely discretionary and quantitative trading. Neither approach is superior or inferior, but rather the suitability depends on the trader's personality traits. For instance, I prefer a mechanized trading model, while my risk control model is subjective. Professional traders tend to have more consolidated thinking and trading methods, while novice traders tend to switch between different methods frequently, repeating the same behavior after experiencing losses. In the following chapters, we will provide a more detailed explanation of this issue.
The initial indication that a novice trader has transitioned into a professional trader is when they stop fixating on trading accuracy. However, this does not imply that they disregard accuracy entirely. It's important to avoid thinking about this matter in a black-and-white manner. Rather, we should refer to it as a passive pursuit of accuracy. At this point, we introduce a new concept known as the risk-reward ratio. Traders with some trading experiences are likely to be familiar with this term, but for consistency throughout this book, I will take a moment to explain it.
Essentially, the risk-reward ratio is a measure that takes into account both risk and return. Suppose Trader A achieves an annual return of 80%, while Trader B achieves an annual return of 60%. Solely relying on return, we cannot determine which trader has better performance. To compare two things, we need to utilize the same benchmark. If Trader A's return is achieved at the expense of an 80% loss, whereas Trader B's return is accomplished with a risk of a 30% loss, then Trader B has, in fact, performed better. This same concept applies to an individual trade. For instance, if you buy a stock of a specific company for $10 and intend to exit profitably at $13 while stopping loss at $9, then you are assuming a risk of losing $1 to gain $3, making it a risk-reward ratio of 1:3, which sounds like a sound trade. Conversely, if you are taking a risk of losing $3 to earn $1, then this trade is not worth executing.
When discussing the risk-reward ratio concept, we can explore two lines of thought: low-risk-reward ratio trades and high-risk-reward ratio trades, with a 1:1 (risk: reward) ratio serving as the dividing point. It's important to consider trading costs in the stop loss (risk-reward ratio adjusted for costs) during the trading process. Professional traders place great emphasis on the combination of trading hit rate and risk-reward ratio. According to experience, almost 80% of all professional traders use a high-risk-reward ratio trading system,/>/>/>/>/>