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How to become a trader

If you want to learn how to become a trader, this can be broken down into several steps, each building on the knowledge and experience of the last. Going through these steps will potentially improve your chances of becoming a confident day trader, swing trader, or long-term position trader.

The more detail and effort put into each and every one of the following steps, the better a trader may be at identifying trading opportunities and potential pitfalls. Consider opening a free demo trading account to generate, practice and refine your trading approach and strategies, as outlined below.

Assess your personality

Some people are more cut out to be day traders​​, while others may prefer long-term investing, and others may find themselves somewhere in between. Some people like following trends, while others are always keen to capitalise on a reversal.

When picking a trading style, here are a few things to consider:

  • How much time do you want to contribute each day to trading? Day traders put in a lot of screen time each day, whereas swing traders put in a lesser amount, and investors may monitor positions and do research every few weeks or months.

  • Consider whether you can sleep with positions open. Some people don’t like this; they want all positions closed at the end of the day, and so they may choose to day trade. Other traders want to capitalise on overnight moves, which makes them more suited to swing trading and holding positions for days to months. Other investors are against closing positions quickly and so they invest for the long-term.

  • If you want action, then day trading or actively swing trading may suit your personality. If you prefer to sit back and watch things unfold, then holding trades for the long-term may be more up your alley.

  • If you like going with the flow, you could consider trend trading​​. If you like going against the flow, or being a contrarian, then trading reversal patterns may be another option.

  • If you are more technology-driven and prefer to leverage algorithms to your advantage, then you could consider quantitative trading​​.

Read as much as you can on trading

Read all sorts of trading articles, books, and videos. Consider reading up on stocks, forex, bonds, indices and ETFs, as well as technical and fundamental analysis. This will give you a better understanding of how each market operates and the catalysts that make prices move, as well as different analysis techniques. Take a look at the range of markets that we offer.

By reading trading books and publications or watching videos, you’ll get an overview of how other people trade. You can then use these ideas to formulate your own trading approach.

If you enjoy reading about current events, then stay on top of both market and world news to see how it affects the markets you are interested in. When making investment decisions, it also helps to consider both macroeconomic and microeconomic factors.

Having a broad knowledge base to pull from can help with the other steps towards becoming a better trader.

Understand what leverage is

Trading with leverage​​ on our platform helps to potentially magnify gains. However, it also magnifies losses if the trade is unsuccessful.

For example, if a trader has a £1,000 account but has 20:1 leverage, they can accumulate positions worth up to £20,000. If they make 10% on the £20,000, their profit is £2,000. That’s a 200% return on the £1,000 originally in their account. Without leverage, a 10% return on £1,000 is a £100 profit.

In an opposite scenario, if the trade was unsuccessful and dropped by 10%, the trader’s loss would be £2,000 or a 200% loss on the account’s original value. This also puts them in danger of falling under the maintenance margin level and could even result in a margin call, if the trade continues to fall.

Leverage is frequently used by day traders and swing traders, whereas investors tend to use it to a lesser extent.

This tactic is also referred to as margin trading​​. For example, if an instrument has a 5% margin, that means you can leverage up to 20:1 on that instrument. You only need to have 5% of the position in the account, which means that a £5,000 index trade only requires an account size of £250 (because £250 is 5% of £5,000).

Decide how much you want to risk

Some traders state the maximum they are willing to lose on a single trade and then stick with it. This is often a specific percentage of the account.

For example, a day trader may risk 0.5% or 1% of their account on each trade. An investor or swing trader may choose to risk the same, or they may choose to risk 2% or 3% per trade. It could also be a dollar amount rather than a percentage.

While no one makes a trade expecting to lose on it, consider how much you are willing to lose before closing the trade, and be ready to admit when the trade is not doing what you expected. Your limit may be £10, £50, or £5,000. It will depend on how much capital you have available to trade and your risk tolerance.

While day traders often trade the same instrument and only trade one instrument at a time, swing traders and investors may not typically put all their money into one instrument. They may spread it out, so if the trade goes sour, their other positions may help offset the loss, which is another form of risk- management.

See our swing trading strategies​ >

Understand risk-management tools

Risk-management tools are used by many traders to contain risk to the levels decided on above. The two most common risk-management tools are stop-loss orders​ and position sizing.

A stop-loss order gets you out of a trade at a predetermined price or loss amount. Learn how to set a stop-loss order so that if the trade or investment doesn’t do what you expect, the stop-loss closes out the trade at or before the maximum amount you are willing to lose on a single trade.

Position sizing is how much of an asset you buy. A larger position size has potentially more risk because if the price moves against you, it may result in a bigger dollar loss than a smaller position size.

Craft your trading strategy or plan

The next step is crafting a trading strategy. A trading strategy builds on the risk-management parameters set and defines exactly when to enter and exit trades. Exits can include both winning and losing trades.

All the steps so far help point a trader toward the strategies they may be interested in working with. Some mentioned so far have included:

  • Day trading

  • Swing trading

  • Trend trading

  • Reversal trading

  • Quant trading

Digging deeper, traders also need to define the types of tools they will use to trigger their entries and exits. Tools include the following:

Earnings reports, financial ratios, or news events could also be trade triggers.

Define exactly what parameters constitute a trade entry and how and when you will exit.

Become a spread better or CFD trader with us

Decide which markets you want to trade

Researching and reading about various markets will help in deciding which market to focus on. Some traders focus on only one market, while others trade on multiple markets.

Common markets to trade include stocks, indices, ETFs, and forex. Each asset type has its own potential for profits and risks, and one market isn’t better or worse than another. But each market is moved by different things, and a strategy that works in one market may not work in another.

When starting out, consider picking one market and getting good at trading it before trying to trade multiple markets at the same time.

Test your trading strategies and gain experience

A strategy may sound great, but it needs to work in the real world. This is where testing comes in.

Retrospectively test a trading strategy by using the rules you have set for yourself to determine entry and exit points that would have occurred in the past. Add up the profits and losses over many trades to see how your strategy might have performed had you executed the trades. This process is called backtesting.

Strategy testing can also be done using a live trading account.

Keep a trading journal

A trading journal provides a record of trades taken and strategies you have tried. This record lets you know what has worked and what hasn’t, which helps to refine a trading approach. A trading journal can be a notebook, or it can be a digital document or spreadsheet file on the computer.

At a minimum, record your trades along with the reasons you took those trades (the strategy). The more details the journal has, the better. Consider including screenshots of each trade because the screenshot shows all the price action and indicators leading into and following the trade, which you could come back to and further analyse later.

It is also beneficial to note any mistakes made. A mistake is any trade that doesn’t align with a strategy. Look through the mistakes each month to see which part of your trading needs the most work. Recording your trades can also help you to understand if your strategy has a viable trading edge​​ and how much money that edge might be expected to earn you over time.

Understand the psychology of trading

Keeping a journal, and especially noting mistakes, will help to highlight how important psychology is in trading. For example, if a trade signal occurred in front of your eyes but it wasn’t taken, there is likely a psychological reason behind that. Possibly fear of losing, not being comfortable with the strategy, self-doubt, analysis paralysis. Whatever the reason is for each mistake, you should look to see if there is a psychological or emotional cause.

Over many trades, most people see the same few mistakes pop up again and again. Find and work on recognising the psychological reasons those mistakes keep happening. This will help reduce the number of mistakes over time.

Refine your strategies

Over time, you will find better ways of doing things. For example, you may notice that the price often keeps running past your profit target, and so you increase your profit target on future trades to extract more profit.

Refinement is different from ‘tinkering’. Randomly taking trades or testing out something new on each trade is tinkering. Refinement is looking at many of your historical trades and finding small changes that could be used to possibly produce more profit in the future.

Aim to profit long-term

Successful trading and investing takes time. It won’t happen overnight. It is a journey with ups and downs. Even professionals have losing streaks, so new traders can expect these too.

The goal is to make an overall profit over the long-term, not necessarily every single day. If a strategy is profitable and then stops working, look through your past trades to see how it can be refined. Also, refer to your trade journal and see if mistakes are to blame for poor performance.

Traders get out what they put into their trading. The more effort put into each one of these steps, the better off the trader or investor will likely be.

Please note that past performance is not a reliable indicator of future results.

How to become a trader

  1. Brush up your knowledge of the markets. This includes the risks that your chosen market or instrument presents.
  2. Learn about costs. Trading fees​ will apply that you need to know about, including spreads, margin rates, overnight costs and commissions.
  3. Understand margin trading. Also known as financial leverage​, this can help to magnify profits if successful but equally losses if unsuccessful.
  4. Learn how to combat risks. This will help you to prevent margin calls and account close-outs if your trades are performing poorly.
  5. Access market data and analysis. Following news and financial trends will help you to stay one step ahead of others.


How long might it take to become a successful trader?

Some traders start out winning. They are quickly able to identify what they are doing well and continue to replicate that. However, more commonly, most traders go through several months, or even years, of trial-and-error before finding a method of trading that suits them. Going through the steps above will help reduce the time it takes to be successful or develop a trading edge.

How much can traders make?

Some traders lose money, some traders break even, some make a little, and some make lots. Financial markets offer nearly unlimited potential, but actual results are dispersed between heavy losses and big profits. Having a well-tested and researched trading plan, and following it, is key to being in the winner’s circle.

Do you need any qualifications to start trading?

Qualifications are not required to trade a personal account. To trade professionally, for a firm, a designation or credentials are often required but will vary by position and location. Learn more about our spread betting and CFD trading accounts see which account type you prefer.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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