There are a lot of misconceptions about online trading especially in depicting the real job of a pro trader. This time we will show what it takes to become a professional trader, what are the different paths you can experiment with.
What type of trader you want to be?
Before giving out my best advice and tips on how to become a trader first, let's make it clear. Trader as a category, is so broad, that it is almost meaningless. So, as an initial step, we have to narrow down our topic. Earning some kind of income from buying and selling different financial instruments like stocks, bonds or currencies, is possible if you either become an institutional trader or a retail trader. These two very distinct categories will be our starting point.
As an employee of a big investment bank you will be the guy running the carousel, meaning that you will execute orders that your clients give. Risk is sitting on their shoulder while you earn a certain commission, that hopefully at the end of the year turns into a hefty bonus. While being a market maker is not the most exciting job on earth (that's why this task gets automated rapidly) it is a very efficient way to get an understanding of how market participants (hedge funds, corporates, speculators, etc) think.
Institutional trading has a very interesting subset that applies quick thinkers who are willing to work under huge pressure and take risk. If you are such a guy - frankly if you searched for this article you have to be one - than proprietary trading is for your consideration. As a prop trader you will risk your firm's money based on your trading ideas. But guess what happens if you don't get the market pulse for a couple of weeks or simply just lay back for a while until the next trading opportunity arrives? You are fired.
Let's see an example of real prop traders:
Describing the group of retail traders is like analyzing the animals of a zoo. But at the end, there are only two type of retail traders. The ones that get fed up with losing, and the ones that carry on and eventually become successful. The bright side of the story is that from being successful, you can build your own brand and influence others like Tim Sykes (later on him). Also, retail traders can earn money from social trading - our eToro review will introduce you to this topic - or from collecting subscribers to webinars and special mentoring.
Seeing these major differences between institutional and retail trading you might ask rightfully?Ok, which one should I bee?
During my own trading career, I started as a retail trader and failed a couple of times. Not wanting to give up, I finally ended up on the institutional side being able to invest other people's money under regulated circumstances. As you can see the two categories are not excluding each other, so don’t think in an either-or way.
How to start trading?
Regardless what path you choose for how to become a trader you will need a solid foundation, an understanding of what factors move the market and what type of tools can help you to spot opportunities.
Here is some everyday trader lingo, let’s test how much you get it.
The risks surrounding the euro area growth outlook are considered to be broadly balanced. On the one hand, the current positive cyclical momentum increases the chances of a stronger than expected economic upswing. On the other hand, downside risks relating to predominantly global factors continue to exist. - Mario Draghi, ECB Press Conference, Tallinn, 8 June 2017
The euro is softening, and the RSI and MACDs warned of more downside risk ahead of next week's FOMC meeting. The euro has slipped below its 20-day moving average (~$1.1190) for the first time since April 18. It has retraced more than 61.8% of the last leg up that began at the end of May from $1.1110. That retracement objective was $1.1180. A break of the $1.1100 area could quickly see $1.1050.- Seekingalpha.com
Both texts sounded Chinese? Time to learn the basics!
Learn the basics
Every trader can reach temporary success but being profitable on the long run requires a lot of knowledge and experience. The good news is that you can quickly collect the basics from free educational sites. Brokerchooser’s top picks are:
Fxstreet / Education / Webinars
DailyFx / Education
Practice on demo account - be foolish, be serious
Paper trading aka demo practice is a must. That should be an intense period of learning but generally I recommend two things to do.
Be foolish: trade like a real gambler, forget about money management rules, stop loss orders, position sizing, etc. Do this to see how easy and quick it is to lose serious money. Seeing a margin call event live is forgivable at this stage.
Be serious: practice with the amount that you will deposit to your real account! Forget the $100.000 sum if you will only deposit $1000 to your live account.
Choose the right broker
Online brokers nowadays are not simply executors of client orders. They will provide you with research, proprietary indicators, and even own education. We at Brokerchooser recon beginners to select a broker that firstly provides great customer service and secondly quality research. Both are important to limit avoidable rookie losses.
If you don't have a broker or would like to find a better one, have a look at Brokerchooser’s top 3 selection for novice traders:
Saxo Bank: Danish investment bank with strong proprietary research. The pricing is relatively competitive, though not the best, their platform is great.
IG: UK CFD specialist, considered to be the market leader in CFD trading. Its product range is really wide and includes share, index, forex, commodity, option and bond CFDs.
Swissquote: leading Swiss online broker with limited CFD product offering. It has a nice trading platform and good research.
Get real experience
During my trading career, I have seen several self-made millionaires and trading wizards. The tiny flow is that the guys were playing on demo accounts. The message is that there is absolutely no point to cheat yourself and dream about shortcuts instead of getting proper, real money experience. As an advice, I can only share the same wisdom with you that I have heard from professional trader Birger Schafermeier on one of his seminars. Birger cited Malcolm Gladwell’s famous 10.000 hours observation on achieving mastery in different activities.
Now let's count. If you have full devotion and trade forty hours a week, it will bring you to pro level in 250 weeks, theoretically. That's almost five years. But of course, even such time of experience will not guarantee a living from full-time trading. But the point is that even after several years of fighting with the markets there are ways of stepping up on the ladder. One is, learning from those who already made it.
Master traders to learn from
Unfortunately, the online trading industry is full of swindlers, hence it is not so easy to find credible traders with a proven professional track record. Here is a little help to start with guaranteed quality.
Paul Tudor Jones: Just try to watch the iconic PBS documentary “Trader” from 1987 and you will understand why PTJ is on the list. Alternatively see what Jack Schwager writes about the great trader in his book, Market Wizards.
Jarratt Davis: Barclay Hedge ranked him as as the second best performing fx trader in the up to $10 million fund size category. Jarratt used this badge very effectively and now runs his own training company. You can access a lot of useful free videos on his Youtube page.
Birger Schafermeier: Better known in Germany, but his book, The Art of Successful Trading includes a lot of great stories about his professional career as well as explanation about his trading strategy
Anton Kreil: ex-Goldman Sachs trader, received large publicity in the BBC series Million Dollar Traders. Anton is well known for his outspoken and sarcastic style, runs his own trading school, called Institute of Trading.
Meir Barak: In his trading videos Meir shows not only his big winners but also the ugly losses that hurt but don't kill. Meir also runs an educational firm.
Tim Sykes: One of the most controversial traders out there, not knowing his background one might think he is a copy of poker star renegade, Dan Bilzerian. The truth is that Tim specializes in penny stock trading (yes Wolf of Wall street theme) but he is quite successful in it.
Final tip for not so rich but talented trader aspirants
Besides the know-how and experience, there is one more inescapable element of becoming a pro trader. And yes, it is money. We all know the not so funny how to make a million, start with a billion anecdote. Well, while millions are desired but not indispensably needed, certainly pocket money won’t break the ground.
And indeed most retail traders fail because they replace the capital needed with leverage and thus trade continuously under extreme risk. The end result? A good old margin call from the broker, or falling into apathy from not being able to progress.
So what can a sharp-witted, talented chap do if he has no chance to risk at least $50-100k as trading capital? Our hero can use other’s capital. As mentioned earlier prop trading firms are risking their owner’s money and basically they let traders, who are full-time employees, to chase the markets and earn the profit using short-term strategies, applying day trading strategies.
Same as finding the right broker, one should do his own homework and research on such companies. But we at Brokerchooser love to find treasure and we don’t keep it secret. Without further ado here is a list of prop trading firms that will definitely propel a trading career.
Finding open positions won’t be difficult but getting in is challenging. Usually, excellent numerical and analytical skills are required and a degree in Mathematics, Engineering or Finance is not a disadvantage either.
Summary on how to become a trader
Learn the theory -
Trading stocks, futures, options and other derivatives are not for dummies. You need to understand the fundamentals and technicals in order to start building a trading strategy.
Get a lot of experience -
Focus not only on quantity but quality. There is no point in burning one micro account after the other. This is the stage where most of the retail traders give up, as they don't apply basic risk management rules. Also, trade with an online broker that will assist you with quality research and further advanced education. Feel free to use our broker comparison table.
Trade a reasonable amount -
Get serious with trading on a well-financed account. If you are a whiz kid like Tim Sykes, you can turn your $5k into millions in a couple of years. If you're not a genius you can still be successful at prop trading firms or if you have some great PR and self-marketing skills you can build your own brand and earn extra income from educating others using your proven track record.
Read on to take the next step in your trading career
- Study our detailed broker comparison table
- Check the best cfd bokers
- Interested in what an online broker can offer? Check out our Saxo Bank review