In this day and age, becoming an independent financial trader is easy. You just need some capital and a brokerage account, and voilà, you’re a trader! The only problem is, trading the markets is not quite so straightforward!
Before anything else, you’ll need to ask yourself WHY you want to become a trader. The answer to this question is crucial as it will determine if trading is for you, so it’s important to be honest with yourself here. Here are three of the most common responses:
Financial freedom: Few professions allow the freedom trading does. It’s important to be clear about what you want. Is it the freedom to purchase that high-end car you’ve always wanted, take the family on a dream vacation or simply add a few more pennies to the retirement fund?
An adrenaline rush: This, we believe, is akin to gambling in a casino. Some individuals enter the industry for a ‘daily fix’ of adrenaline. Unfortunately, just like most gamblers this will only end one way: an empty account.
Prestige: Do you need to be that guy who turns up at dinner parties in a Ferrari? If you’re trading to impress, greed will eventually take over and could lead to ruin. You have to be humble in this game, or it WILL humble you! The ability to control one’s emotions is a HUGE part of trading.
Successful traders/investors, in our experience, have one thing in common: they all have a clear purpose/goal. This is to make money. They’re not trading to feed their egos, impress friends or to get a daily boost of adrenaline. It all comes down to making money year in year out.
Can anyone be a trader? With a healthy amount of will power and determination we believe so. With that being said, however, learning to trade is not easy. In fact, it’s one of the most challenging tasks you will undertake in your lifetime.
Malcolm Gladwell gave us the 10,000-hour rule. Gladwell stated that anyone can master a skill with 10,000 hours of practice. While this number may seem a bit excessive to some, we have had the opportunity to interview traders who confessed to having studied for over five years, spending 3-5 hours a day glued to the charts before reaching proficiency. Some even admitted to studying for as long as ten years! For that reason, we believe there is some truth to the 10,000-hour rule. As such, enrolling on a weekend course will NOT, despite what the advert or guru claims, magically transform you into Warren Buffet or George Soros. To become versed in this profession, it takes time, discipline, hard work and commitment.
Learning to separate life from trading is important. In the earlier stages of your journey one has to be careful not to become addicted. While we would agree that one needs to have a certain obsession in order to succeed, we would advise trying to set scheduled study times. When it’s only you and the charts with little distraction, this will help get the most out of the time you spend at the computer.
The three most common types of traders operating in the market are: the day trader, the swing trader and the position trader.
Becoming a day trader (sometimes referred to as a ‘scalper’) seems to be the more appealing route these days. Typically, a day trader’s positions are liquidated prior to the market close. The objective is to capture profit from small moves. Trades are often short term, sometimes only lasting for a few minutes. it’s not uncommon for a short-term trader to take ten trades a day, some do crank out a lot more though! Traders in this category tend to focus on the lower timeframes, using the 1, 5 and 15 minute periods.
A swing trader on the other hand takes a slightly different view on the markets and looks to take advantage of the longer timeframes such as the H1 and H4 periods. Trades usually last for a few hours, but can stretch to a couple of days or longer. Unlike a day trader, swing traders do not have to be at their computers all day and generally risk between 1-2% of their account on each trade. This allows the trader free time during the day to do other things.
And finally, we have the position trader. This approach usually entails using larger timeframes: the daily, weekly and monthly periods. Traders who adopt this method will have a long-term plan in place. Trades can span days, weeks or even sometimes years if the trend is in one’s favour. You need a healthy dose of patience to trade this way, and often only need to check the charts once a day.
We would not recommend singling one out here, since both technical and fundamental analysis are useful.
Fundamental analysis helps answer WHY a market is moving in a particular direction. For example, is the currency pair rallying due to an expected rate hike in the near future, or is the move fuelled by a country’s political stance? Knowing what causes markets to move helps one pin down market direction in the future.
Technical analysis helps define WHEN to trade. Assuming that we know the underlying fundamentals are supporting a rally in the dollar, for example, but price action is seen trading at the underside of a strong resistance (which essentially means a level in the market that price has trouble breaking above in the past), this may not be the best time to buy the currency. However, once that resistance is consumed, a buy is high probability since the trade now has both technical and fundamental cues signalling that the dollar is likely to strengthen.
Sadly, this section is often overlooked which is a shame since it is said that trading is 80% psychological and 20% technical. A plethora of books have even been written on the subject. Here are a few points to think about:
Working on yourself (your mindset) as well as the trading method is just as important! Make sure to research this subject as it can make or break you as a trader.
Do not make the mistake of thinking trading is easy. Learn to think like a professional. Take time to understand your psychology and the market you’re trading.
Here’s a brief step-by-step guide we’ve put together for our readers:
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