Being a trader is an attractive prospect to many, with people thinking that trading is a way to make easy money. However, without a clear and outlined approach to becoming a trader, you are putting yourself at an extreme disadvantage and increasing the chance of you making a loss.
Trading for Own Account
Becoming a trader by yourself can be a daunting task, and indeed many traders with this intention fail and end up making a loss. Luckily, by doing your research before making your trade, you are already on the right path to becoming a successful trader. We have compiled a list of important steps to take when you are thinking about becoming an independent trader. Firstly, it is important to educate yourself, which can be done in many ways, including getting a mentor or using online resources. It will also be important to find a reliable broker that you can trust. Finally, you need to decide what to trade, pin down your strategy, and manage your risk, all of which we will go into more detail about below.
Education is the bedrock of your ability to become a trader and is absolutely essential to becoming a successful one. Fortunately for you, there are many resources available to you that will allow you to learn the technical skills required to become a trader, which includes getting a mentor and using online education resources.
Get a Mentor
An excellent way of acquiring the skills necessary to become a trader is to find a Yoda, i.e. seek help from an established independent trader. A mentor like this has been in the same situation as you at some point and so has invaluable experience with how to get started. They will also be useful in guiding you to what techniques are the most important when starting out. You should treat your mentor like a guiding influence and not a teacher. Going up to your mentor and saying, “teach me how to be a successful trader” is a fruitless exercise as they will not be able to teach you everything you need to know.
Instead, ask for tips and pointers, online resources that you can use or techniques that are essential when starting out. It is important to nurture professional relationships like this in any industry, but when going into trading, it is extremely important.
This may be obvious to you as you are reading this article on an online resource that will help you to become a trader. In fact, the education resources here at Hantec are comprehensive and accessible, so you should definitely check those out. We cannot stress enough how important the internet will be in becoming a trader. All technical concepts will have countless numbers of resources available online for you to browse. If you are struggling with one website’s explanation of a certain concept, find another, there really is no downside to consuming as much information as possible. A quick tip, make your own succinct and organised notes of concepts that you come across online. This will make it much easier to return to down the line, and saves you having to do your research all over again!
Find a Broker You Trust
There are a significant number of brokers out there that you can use to start trading, and each one has their own pros and cons. We are not going to tell you the “best” broker to use but we are going to outline a set of criteria that your chosen broker should satisfy. Firstly, the broker needs to be trustworthy which in this context means they may be regulated or publicly traded. It is also important to choose a broker based on the assets that you can trade on their platform (see below).
Another important factor when choosing a broker is the costs associated with trading on that platform. It is also worth considering the educational, technical, and research resources that are available through each platform. It can be a daunting task to decide which broker to use but narrowing the criteria down to a set that best suit you is a good place to start. We believe that Hantec is a great place to start!
Decide What to Trade
Deciding what to trade is a key part of becoming a trader. We recommend that you trade what you know, for example, if you already have a theoretical grounding in commodities markets, it is a good idea to trade commodities. There are five asset classes in financial markets that you can trade: Forex, Individual Stocks, Stock Indices, Bonds, and Commodities. It is up to you to research each of these individual asset classes, we recommend you choose an asset class that you will continue to find interesting throughout the mastering of the trading of that asset class. That leads us into our final point about deciding what to trade: become a master of one and not a jack of all trades, you will be a much more effective trader for it.
To be an effective trader, once you have educated yourself, chosen a broker, and decided what you are going to trade, you will need to develop a trading strategy. This strategy needs to suit your individual goals and aims and will reflect your individual attitude towards profit and risk. You can learn more about strategy building in our article How to Build a Trading Plan and Strategy: 10-Steps Guide to Success.
Build a Strategy
Firstly, you will need to build a strategy by focusing on 6 key concepts, these are the time horizon, trading direction, entry requirements, stop-loss placement, target levels, and risk management.
The time horizon just determines for how long you will hold onto an asset from the asset class that you choose. For example, you can be a day trader, where you hold an asset for less than a day, or you can be an investor and hold assets for weeks and months at a time. You should do your own research on which time horizon best suits your personal skills and goals. Your trading direction determines whether you will buy or sell and go short or go long. Once you have decided this, you move on to your entry position, when do you enter a trade? This will almost always be at a certain price. Your stop-loss placement is the point at which you will forfeit the trade. These are put in place not to avoid a monetary loss but as a threshold over which your initial assessment of the market is no longer valid. This may be due to an initial misjudgement or changing market conditions. A target level is a point at which you take the profit from the trade, and your monetary gain becomes realised.
The stop-loss and target level are two key parts of the most important concept when deciding on a trading strategy: your risk management. The stop-loss and target level can be used to calculate the Reward to Risk ratio (you can learn more about Reward to Risk ratio if you are not familiar), which at the minimum needs to be 1:1, but ideally would be greater than this. It is also a good idea to follow the rule that only 1% of your total assets should be at risk at any one time. These two rules of thumb are the most common in trading, and there are many more that you will come across in your research. Choose rules regarding the risk that satisfy your own assessment of your risk aversion, which will depend on your psychological profile.
Test The Strategy
You will not achieve your perfect strategy straight away. Therefore, it is paramount that you back-test your strategy in a demo environment before applying it to your real assets. This way you can use trial and error to prove concepts and learn things about your psychological profile with no real cost. It is also a good idea to create a trading log to get a more detailed analysis of your trading decisions beyond the analysis provided by your choice of broker. It is important that you can sustain any log you do choose to create over the entirety of your trading career.
Key Takeaways to Becoming a Trader
By now, you should have a good understanding of the steps you need to take before you can even make your first trade, and we are not going to repeat any of the information above here. What we will do is leave you with some key takeaways before you start this journey.
- Nothing is a substitute for hard work, the more time and effort you put into learning your trade, the more successful you will be.
- Be patient and be disciplined, you are not going to be the next Warren Buffet overnight, do not take enormous risks in the pursuit of life-changing profit.
- Enjoy it! If you are choosing to go down the path of trading by yourself, you have to enjoy it, otherwise, you will not be able to sustain it. It suits a certain type of person, and so you need to be introspective about whether you are able to follow the guidance we have outlined in this article.
Becoming a trader can change your life for the better and be incredibly rewarding, we hope that we have given you a little more insight into the essential steps required should you choose to go down this path.