How to become a trader

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:

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.

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).

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. Read our overview of risk-management strategies​.

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.

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, investing, trend trading, reversal trading, quantitative trading, technical and fundamental trading.

Digging deeper, traders also need to define the types of tools they will use to trigger their entries and exits. Tools include Fibonacci retracements, price action, moving averages, or another type of technical indicator​. 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.

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, options, indices, ETFs, and forex trading. 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.

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.

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.

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 traders and investors 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.

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.

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.