How to Become a Trader

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How to Become a Trader

Updated: March 28, 2020 | References

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Traders have to be able to quickly analyse lots of information and make well-informed decisions under high levels of pressure. Trading can be very profitable, but is also high risk. You can work for a financial institution, trading with the bank’s money, or money from the bank’s clients. You can also work with your own clients, advising them on good investment opportunities.

How to Become a Professional Trader

Take Your Trading to the Next Level

To become a professional trader, you must learn trading basics and advanced basics. Once these are mastered, you can learn proven strategies and gain experience in implementing them.

Also, it’s important to be realistic about this profession. There is no perfect method of trading that consistently produces only winning results. However, if you practice learning to discriminate accurate information from that which is incorrect or misleading, you can spend most of your time focusing on information that will make you a more efficient and profitable trader.

Trading Basics

One of the most efficient methods for learning to trade is learning market and trading basics. A solid understanding of the basics provides the foundation that will support your entire career. This first level of knowledge is required before more advanced trading information can be successfully implemented.

Books on trading found at your local bookstore or reputable trading websites can provide you with all the trading basics you need at a relatively low cost or no cost. The basics include all of the factual information about trading, such as:

  • What markets to trade
  • How prices move (bid and ask prices)
  • Order types and how to place them
  • Risk management
  • Trading hours
  • How to monitor trading performance
  • How much capital is required to trade efficiently

Trading basics are typically factual in nature, and there isn’t much subjectivity. One information source may say to start currency or forex trading with at least $500, while another source may say to start with at least $1,000. One source isn’t necessarily right or wrong. The information from multiple sources is indicating that you should definitely start with at least $500 and ideally with $1,000 or more.

The exchanges themselves provide traders with most of the market basics. For example, the New York Stock Exchange and NASDAQ provide educational resources on how the stock market operates through the main menus on their websites. The Chicago Mercantile Exchange does this for futures and the Chicago Board Options Exchange does the same for those wanting to learn about options trading.

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Learning the Advanced Basics

Learning trading basics gives new traders an opportunity to learn about the various markets and the one in which they want to trade.

When learning the basics, traders determine if they want to trade stocks, futures, options or forex trading. Upon making this choice, they can then delve deeper into the trading basics specific to that market.

For example, a new options trader needs to learn about options Greeks, which help determine the price of an option. Those interested in futures trading need to learn about ticks, points, and the various specifications for each futures contract they may want to trade. Stock traders need to learn how to short sell, how dividends work, and the differences between pre-market trading and trading during normal hours. Forex traders need to learn about pip values and daily rollover rates.

Books on trading and instructional websites can offer information and lessons on these and other more advanced basics topics.

Trading Systems and Techniques

The next step is to learn strategies that will produce a profit in whatever market you want to trade. Such strategies are subjective, which means the source of the information matters. Free resources may provide generic strategies that worked at one time, but no longer work.

Finding viable strategies requires much more research and verification than learning trading basics. When learning strategies, review charts and look for examples of the strategy at work. If it seems it could be profitable on your own small real-world test, then continue investing some time in the method. If not, leave the method alone.

The best method of learning a trading technique is to find a professional trader that will teach you their trading technique. Some professional traders offer websites or books highlighting their methods. They may also provide personal mentoring, which is the most direct approach to learning how to trade.

It is also possible to learn a discretionary trading technique without any form of instruction. Self-learning is fine, but it may take longer to come up with a profitable system when compared to learning a system that is already profitable.

Many professional traders develop their own trading methods by continually studying charts, noticing certain patterns or tendencies, and then developing a system that exploits those tendencies. This may take months or even years of testing before the trader finds a viable method that produces profits consistently.

Gain Some Trading Experience

Practice doesn’t make perfect, but in trading at least, perfect practice makes improvements. You’ll never achieve perfect results because not all trades are won, even by professional traders. And that is okay.

You don’t need to win every trade to produce a good living. What is required, though, is implementing your method nearly perfectly. This is within your control, while results are not. If you do the right thing, favorable results are more likely. Doing the right thing is following the methods you have learned and opted to use.

Use Paper Trading for Training

When first learning a trading method it may seem very easy. However, once you begin to implement it, it may be harder in actuality than you had anticipated. Most traders quit at this stage and seek out another strategy. Unfortunately, these types of people rarely become successful. Even a simple trading strategy often requires at least several months of hands-on experience before the method starts producing profitable results.

Many trading platforms offer a paper trading capability, which is trading with “fake” money instead of your own, real dollars. As you develop trading strategies, you can try them out with paper money and real-time market movements. Some platforms also offer historical market data, and many professionals use this to back-test their trading strategies to test whether the trades would work under various known market conditions.

As a trader progresses and gains more experience, they will likely find ways to improve their strategies or notice other market tendencies that can be exploited if another strategy is formulated. A successful trader may also find that a strategy that once worked is no longer performing well. In this way, a trader is always learning from their experiences and trying to find better ways of performing their job. They are simply adapting to changes in the market that may make current strategies obsolete but provides an opportunity for a new strategy to be deployed.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

10 Steps to Becoming a Day Trader

In a world where everyone has easy access to online trading, why are there only a few succeeding as day traders? After all, what investor has not dreamed of becoming a day trader – working comfortably at a home computer, being your own boss, watching profits roll in? While many aspire, few actually succeed.

Key Takeaways

  • Day traders actively engage with the market, employing intra-day strategies to profit off quick price changes in a given security.
  • To become a day trader, you must be sure to be well-enough capitalized and have access to an affordable and functional trading platform.
  • Day trading can be a lucrative undertaking, but it also comes with a high degree of risk and uncertainty.
  • A thorough understanding of markets, financial securities, and behavioral finance – along with personal discipline and focus – are necessary for success.

What Does a Day Trader Do?

A day trader actively buys and sells securities, often multiple times during the day, but without carrying any open positions to the next day. All buy/sell positions taken during a trading day are squared-off on the same day before the market closes. Day traders are different from active traders who may hold a position for multiple days, or from investors who invest for longer periods. Day traders also use leverage to increase their intraday trade exposure.

How To Become A Day Trader

1. Conduct a Self-Assessment

Successful day trading requires a combination of knowledge, skills, and traits as well as a commitment to a lifestyle. Are you adept with mathematical analysis, full of financial knowledge, aware of behavioral psychology (in yourself as well as others), and do you have the stomach for entrepreneurship? Contrary to the perceived notion of an easy life or easy money, day trading actually requires:

  • Long working hours
  • Very little leave from work
  • Continuous self-learning with no guidance
  • Risk-taking abilities
  • Never-ending commitment to daily activities of the job

The right mindset is the most important (and the very first) requirement in becoming a day trader. Unless one is prepared to devote time, self-learn and be mentally prepared to take risks and suffer losses, do not try day trading. Books like “Trade Your Way to Financial Freedom” by Van Tharp and “The Psychology of Trading” by Brett N. Steenbarger are good resources for learning more about day trading and performing a self-assessment.

2. Arrange Sufficient Capital

No one can generate profits consistently. Intermittent and extended losses are part of the day trading game. (For example, a day trader may suffer eight loss-making trades in a row and only recover with profit on the ninth trade.)

To handle these risks, a day trader must have a sufficient cushion of capital. As Van Tharp explained in “Trade Your Way to Financial Freedom,” entering the trading world with only a small amount of money is a sure path to failure. Before quitting your job to trade full time, Tharp recommends having at least $100,000 for trading. Novices can start with smaller amounts, depending upon their selected trading plan, the frequency of trading, and other costs they bear. To actively day trade it is required that you maintain a balance of $10,000 in your trading account.

3. Understand the Markets

Day traders need a solid foundation of knowledge about how the markets function. From simple details (like exchange trading hours and holidays) to complex details (like the impact of news events, margin requirements, and allowed tradable instruments), a trader needs to have a broad knowledge base.

4. Understand Securities

Stocks, futures, options, ETFs, and mutual funds all trade differently. Without a clear understanding of a security’s characteristics and trading requirements, initiating a trading strategy can lead to failure. For example, traders should know how margin requirements for futures, options, and commodities significantly impact trading capital or how an interim assignment or exercise of an option position can shatter the trading plan completely.

Lack of knowledge about these necessities specific to securities can lead to losses. Aspiring traders should ensure full familiarity with the trading of selected securities.

5. Setup a Trading Strategy

Novice traders entering the world of trading can begin by selecting at least two established trade strategies. Both would act as a backup of each other in case of failure or lack of trading opportunities. One can move on to more number of strategies (with more complexities) later, as the experience builds up.

The trading world is highly dynamic. Trading strategies can consistently make money for long periods but then fail at any time. One needs to keep a close eye on the effectiveness of the selected trading strategy and adapt, customize, dump or substitute it depending upon the developments.

6. Integrate Strategy and Plan

Selecting the right trading strategies alone is not sufficient to succeed in the market. The following considerations need to complement the strategy, to come up with the trading plan:

  • How the strategy will be used (entry/exit strategy)
  • How much capital will be used
  • How much money per trade will be used
  • Which assets will be traded
  • How frequency to place trades

7. Practice Money Management

Let’s say you have $100,000 as trading capital and an excellent trading strategy that offers a 70 percent success rate (7 trades out of 10 are profitable). How much should you spend on your first trade? What if the first three trades are a failure? What if the average record (7 profitable trades out of 10) no longer holds? Or, while trading futures (or options), how should you allocate your capital to margin money requirements?

Money management helps you address these challenges. Effective money management can help you win even if there are only 4 profitable trades out of 10. Practice, plan and structure the trades according to money management and capital allocation plan.

8. Research Brokerage Charges

Day trading usually involves frequent transactions, which result in high brokerage costs. After thorough research, select the brokerage plan wisely. If one intends to play with one-two trades per day, then a per trade basis brokerage plan would be appropriate. If the daily trading volume is high, go for staggered plans (the higher the volume, the lower the effective cost) or fixed plans (unlimited trades for a fixed high charge)

Apart from trade execution, a broker also offers other trading utilities, which includes trading platforms, integrated trading solutions like option combinations, trading software, historical data, research tools, trading alerts, charting application with technical indicators and several other features. Some features may be free while some may come at a cost which can eat into your profits.

It is advisable to select the features depending upon your trading needs and avoid subscribing to ones which are not needed. Novices should start with the low-cost basic brokerage package matching their initial trading needs and later opt for upgrades to other modules when needed.

9. Simulate and Back Test

Once the plan is ready, simulate it on a test account with virtual money (most brokers offer such test accounts). Alternatively, one can backtest the strategy on historical data. For a realistic assessment, keep consideration for brokerage costs and the subscription fee for various utilities.

10. Start Small and Then Expand

Even if you have sufficient money and sufficient experience, don’t play big on the first trades of a new strategy. Try out a new strategy with a smaller amount and increase the stakes after tasting success. Remember, markets and trading opportunities will remain forever, but money, once lost, may be difficult to re-accumulate. Start small, test to establish, and then go for the big ones.

The Bottom Line

Aspiring traders should beware of websites and courses that promise foolproof day trading success or endless profits. The limited percentage of day traders who have managed to be successful do so by investing their time and efforts into building trading strategies and following them religiously.

A day trader is on his own in this big trading world. Before giving up your job to become a day trader, be sure that you have the motivation to continuously learn, design your trading strategies, and take accountability for your decisions and actions. If you’re looking to jump into the world of day trading, you can use one of the best stock brokers for day trading.

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