How to Become a Trader in 2024
There are several key steps that can help a novice trader evolve into a professional. Understanding this logical progression early in your career can significantly boost your chances of becoming an expert in this field.
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Prioritize Your Education
Knowledge is a powerful tool, especially in trading. Successful traders have dedicated thousands of hours to studying before engaging in actual trading. Some have obtained degrees in finance, others have completed specialized courses, and many have discovered trading patterns through rigorous backtesting.
Approach trading as a profession, not just a hobby. Take your education seriously by attending both offline and online trading lectures, seeking out necessary information on the internet, and testing your hypotheses on demo accounts. You'll know you're ready for real trading when you can logically explain every price movement on your charts.
Make sure you understand the following key topics:
- The Logic of Supply and Demand: To purchase an asset, a buyer must find a seller, and vice versa. However, you're interacting with a price chart on your computer, and you must learn to identify areas of potential supply and demand, key levels, and zones of active trading.
- Types of Orders: Understand the different types of orders, such as limit orders, market orders, and stop-limit orders.
- Market Analysis: Familiarize yourself with the basics of fundamental, technical, and sentiment analysis.
Moving forward, concentrate on mastering a specific trading concept. Avoid trying to cover everything at once. Grasp the logic and test the efficacy of your chosen method (for example, technical analysis tools). If you are satisfied with the results, continue to delve deeper into that strategy; if not, consider exploring other techniques.
Determine Your Trading Style
The market behaves fractally: candlestick patterns observed on a daily timeframe are likely to behave similarly on both weekly and minute timeframes. Your task is to identify a trading style that suits you, allowing you to analyze the timeframes that best fit your personal approach.
Trading style is defined by the duration for which you hold a position. This affects several factors: how much time you spend in front of charts (for example, catching a pattern on an hourly timeframe might require a full day, while checking weekly charts may only need a few minutes a few times per week), the rules you use to manage trades, and your risk tolerance. These elements are heavily influenced by your temperament, so you'll need to figure them out on your own.
Five main trading styles are recognized:
- Scalping: This involves making profits from short-lived price movements, with positions held for just a few minutes to an hour. It demands that traders constantly monitor their computers and make decisions quickly.
- Intraday Trading: The lifespan of intraday positions is typically 1–4 hours. Traders need to be present at their charts throughout the day or for specific trading sessions. These trades are closed at the end of the trading day and are not rolled over to the next day.
- Intraweek Trading: This style requires less frequent engagement, involving about two hours of chart analysis on Monday and a few minutes for opening a trade on another day. Positions are maintained for 2–3 days and are closed by Friday, not carrying over into the next week.
- Swing Trading: This strategy involves trading from one price swing to another and is not bound by time but by asset price: positions are only closed after reaching a specific price level. The duration of swing positions can vary from several days to weeks or even months.
- Positional Trading: This approach involves holding positions for several months to 1–2 years. Traders in this style aim to capture long-term trends and must allocate a significant portion of their deposit to sustain their positions.
To select an appropriate trading style, you must determine how much time you are willing to dedicate to trading. For instance, if you have a primary job and can only monitor the charts for 1–2 hours per day, swing and intraweek trading styles might be suitable. If you can allocate 4–5 hours per day, intraday trading might be a better fit.
Moreover, a trader’s stress tolerance significantly influences their choice of trading style. Those who can remain calm during financial losses and respond quickly and impartially to sudden price changes, and who are resistant to FOMO and FUD, may be well-suited to scalping. In contrast, more reflective and patient individuals might prefer intraday or intraweek trading.
Formulate Risk Management Rules
The ratio of profitable to unprofitable positions isn't as crucial as the profit-to-loss (P/L) ratio. For instance, you might lose on 8 out of 10 trades, but with effective risk management, you could still end up profitable.
Risk Management (RM) involves setting systematic rules for managing risks. It includes specifying the size of trades, adjusting this size based on different variables, defining the maximum allowable daily, weekly, monthly, or quarterly loss, and setting rules for moving trades to a break-even level. RM also details how traders should handle a losing streak—a series of unprofitable trades that can potentially stir up counterproductive emotions.
For effective risk management, it's essential to gather statistical data on how your trading setups perform, including the win rate (WR), the risk-reward (RR) ratio, and the number of trades over a specific period. This information is typically obtained through backtesting—evaluating the effectiveness of a setup using historical data.
For example, let's say a trader analyzes price movements from the last year and derives the following metrics:
- Setup success probability: 70%
- Average RR ratio: 1:2.25
- Average number of trades per month: 12
- Maximum number of consecutive losses (losing streak): 7 trades.
The next step is to calculate the expected value of the setup, which indicates the likely profit for each trade. This is done by multiplying the setup's success probability by the potential profit and subtracting the probability of failure multiplied by the potential loss:
Expected Profit per Trade=(70%×2.25R)−(30%×1R)=1.275R, or 27.5%.
To simplify calculations, traders often round WR and RR values and refer to a pre-established table that maps these ratios, rather than computing them manually each time.
A WR and RR ratio table shows the expected return on a trade. Source: reddit.com
Once a trader understands the expected value of a setup, they can determine the appropriate risk per trade. This calculation involves dividing the desired monthly profit (say, the trader aims for a 10% net profit per month) by the product of the expected value and the total number of trades for that period.
10% / 1,275R * 12 = 0,653% — this is the calculated risk per trade.
The reason we highlight the maximum losing streak is crucial. It ensures that the calculated risk per trade aligns with the trader’s operational guidelines.
For example, imagine a trader operating with a proprietary trading firm's account, which stipulates that the maximum loss cannot exceed 5%. If the maximum losing streak over the last year was 7 trades, then in a similar future scenario, the trader would incur a loss of 7×0.653%=4.57%. This figure is under the 5% threshold, making a risk of 0.653% per trade acceptable. However, if the figure were higher, it would be necessary to adjust the risk per trade downwards to stay within acceptable limits.
Develop a Trading Strategy
Every trader is unique. Some excel at identifying candlestick patterns, others understand the impact of news on asset prices well, while others rely on their intuition. At the beginning of your career, it’s crucial to identify these strengths to build a trading strategy tailored to them.
There’s no one-size-fits-all trading strategy template. The components of your trading strategy should be customized to fit your needs. However, some common elements are essential for all strategies:
- Trading Setups: A profitable strategy might include one or several trading setups. The effectiveness of sticking to a single setup versus switching between multiple patterns varies among traders. Some are successful with a consistent approach, while others find success in versatility.
- Timeframes: The choice of timeframe will depend on your trading style. Whether you prefer fast-paced day trading or more prolonged swing trading will influence your preferred timeframes.
- Trading Period: If mornings are tough for you, you might skip the London session (starting at 07:00 UTC) and begin trading closer to the New York session (starting at 12:00 UTC).
- Position Management: Establish goals for when you’ll partially close your trades. For example, when trading a trend, you might close 70% of your position at the first target, 20% at the second, and the remaining 10% at the final target.
Incorporate your “secret sauce.” For instance, you might find that working with music, closed curtains, and the air conditioner on helps you focus better.
Keep in mind that your first trading strategy is just a starting point. It is likely to undergo changes after the first 5–6 months as you gain more experience, better understand specific trading instruments, and most importantly, improve your trading discipline.
Maintain a Trading Journal
It's essential for every trader to record every trade in a journal. This practice allows traders to create a personal database, facilitating the analysis of factors that contribute to successful and unsuccessful trades.
You can keep this journal in any format that suits you: a physical notebook, an Excel spreadsheet, or Notion, which is particularly popular among traders. Utilize the “database” feature to compile a comprehensive log that includes details of trades, emotions experienced, trading notes, and backtesting results. The advantage of using an app like Notion lies in its flexibility to meet individual user needs.
Example of a trading journal in Notion. Source: notion.so
At the beginning, make it a practice to jot down everything you notice on the charts. Remember, an unrecorded and unanalyzed mistake is bound to be repeated.
Final Words
Beginners often enter trading with unrealistic expectations, influenced by a skewed perception of the industry: they typically see only successful cases highlighted on social media (a classic example of survivorship bias), while in reality, only 1-5% of traders consistently make a profit. Additionally, beginners may experience the Dunning-Kruger effect, a cognitive bias where individuals with limited knowledge and skill overestimate their own capabilities.
Dunning-Kruger Effect — the correlation between competence and confidence. Source: conversion-uplift.co.uk
Avoid diving headfirst into trading. Start with manageable steps: dedicate 1-2 hours daily to trading and an additional hour for analyzing trades and gathering statistics. Do not consider quitting your main job until your monthly income from trading consistently exceeds your regular earnings by three to four times.
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