How to become a trader

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Simon Brown
Simon Brown

There is no easy way to start trading. It takes time, discipline and practice if you don’t want to lose a lot of money.

At the heart of success in short-term trading is discipline. Without it failure is a certainty. But this easy-sounding statement masks a lot of complex issues that will trip up many traders.

The first point when starting is to have discipline. But discipline for what? The answer is discipline to your trading strategy. This brings us to the first hurdle: what strategy? As a newbie trader you’ll have no idea of what sort of strategies are possible. The only way you’re going to find a style of trading that suits you and your personality is by trying different ways and seeing which you find the easiest and which makes the most sense to you.

This involves a lot of research and trial and error and this all before you’ve even opened a brokerage account. But here also lies the first real challenge. You must set the rules within an environment where you can create any rules that define your strategy. There is no silver bullet that says do this and succeed. Every trader is different and even traders trading in the same style, for example trend following, will have different strategies.

What is important is to set the boundaries. For example, do you want to be a day trader, meaning there are no open trades at the end of the day, which entails watching charts all day long. If you have a day job this is impossible, but even if trading is to ultimately be your day job, do you want to be tied to a screen all and every day?

I’ve designed trend based trading systems that I call lazy, they require as little screen time as possible. I manage this by using daily charts that only need checking once per day after the close. I also only trade a handful of indices and some FX so that the number of charts I check every day is no more than a dozen and it takes literally a few minutes every morning before the market opens.

Once you start to refine a strategy you then need to test it. That means you’ll need a broker or at least some charting software. Most online brokers these days offer great online charting software for free as do many websites. So, you don’t need to spend any money buying software and then paying for a data feed.

Once you have your charts, you’ll need to start doing paper trading and testing your strategy’s ideas. Go back a couple of years and back test your strategy finding the entries your system would have triggered with the resulting exits and see if it makes money. While doing this also paper trade the live market.

Here you are testing not only your system’s potential to make money but also your ability to manage the trades.

Ideally, you’d want to do at least 100 trades on paper, but more is better and while hundreds of trades could take months it is well worth the time spent.

Once paper trading is profitable, you’ll need to start trading with real cash, but use a small amount because the risks of a newbie making a mistake are real and you don’t want that mistake to be costly. Again, while trading small, you’ll need to do ideally 100 of those and this will again take months maybe even a year or more.

When this stage shows consistent profits, you can start scaling up your portfolio’s size.

Overall, this process from deciding to be a trader to becoming one is likely to have taken a few years, but if you succeed it is worth all the effort having started correctly.

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This article was written exclusively for finweek's 1 October newsletter. You can subscribe to the weekly newsletter here.

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