10 Steps to Becoming a Trader

Today’s guest is Mark Hodge of Rockwell Trading. The very basics of trading are often overlooked by new traders and I think we all can agree that you need a solid foundation to prosper in today’s markets. Mark decided to write a post on what, in his experience, makes a successful trader. Be sure to comment and feel free to share your success (and horror) stories of becoming a trader. Also, don’t forget to visit Mark at Rockwell Trading.

With the way the markets have been behaving these days, it’s no surprise that more and more people are interested in trading. If you’re new to trading, you’re probably attracted to the potential to make money, but you’ve heard horror stories about traders that have lost money in the markets as well. If you’ve been trading for awhile, you probably have a horror story or two of your own. These stories and experiences are important to share, but it’s unfortunate when many of these horror stories could have been avoided by understanding what it takes to become a trader, and by having direction early on.

The following “10 Steps to Becoming a Trader” provide a structured and systematic approach to becoming the trader you want to be. By following these “10 steps” you will be in the best position possible to achieve your goals as a trader:

Step 1 – Determine the type of trader that you want to be.
Sounds simple enough, but if you don’t address this key step it will be difficult to progress as a trader. What markets and time-frame will you trade? You’ll discover that your situation and goals will have a direct impact on the type of trader you decide to be. So ask yourself, what type of trader will you be?

Step 2 – Decide on a trading strategy.
By understanding the type of trader that you want to be (Step 1), you can narrow down your search and education to learn strategies that are appropriate for you. Don’t worry about learning strategies for markets or time-frames that you won’t be trading.

Step 3 – Get a charting package and trading platform.
Your charting and trading platforms should be tools, not barriers. Don’t let your charting package and trading platform prevent you from becoming the trader you want to be. Once you know the type of trader you will be and strategies you could possible use, you can then decide on the platforms that suit your needs.

Step 4 – Practice your strategy.
Although some trading strategies might be simple by nature, they can be extremely difficult to apply successfully without experiencing wins, losses, and draw-downs first hand. With practice you will be able to create personal experiences trading a strategy, which in turn will increase your confidence and give you performance numbers that can be evaluated. This practice and confidence is paramount to your eventual success trading a strategy live.

Step 5 – Learn chart reading skills.
Markets will trend or move sideways. Unfortunately there isn’t one strategy that is perfect for all market conditions. Understanding when to trade the right type of strategy using chart reading skills will help you improve the performance of the strategies you are trading.

Step 6 – Understand money management.
If the concept of money management is new to you, money management is simply a strategy for increasing or decreasing your position size. Even though the actual use of money management comes down the road, make it a point to learn about money management before moving on the next stage.

Step 7 – Create a trading plan.
Many traders are confused about the difference between a strategy and a trading plan. A trading plan is a comprehensive guide that goes beyond just basic strategy entry and exit rules. A strategy might tell you where to enter and exit a trade, but your trading plan will outline when to take a trade using a strategy.

In addition to covering specific guidelines for applying your trading strategies, a trading plan will cover goals, objectives, the markets you will trade, risk management, money management and more.

Step 8 – Execute your trading plan on a simulated account.
Even with trading, practice makes perfect. Practice your plan and evaluate your results. If you can’t make money trading your plan on a simulated account, you can’t expect that this will change when you trade your account live. When you do show consistent profits in a simulated account, it’s time to move onto the next stage.

Step 9 – Execute your trading plan on a live account.
After you have achieved simulated profits trading your plan, it’s time to trade a live account, but start small! Focus on consistent execution trading the plan you have practiced, and profits should follow.

Once you are able to achieve consistent profits it’s time to move on to Step 10.

Step 10 – Use money management to grow your account.
When you prove that you can take profits out of the market consistently trading your plan, it’s time to increase your position size in order to grow your account. There are different money management strategies that can be used, but traders should always increase their position sizes with profits, and decrease position sizes with losses (known as anti-martingale money management). When using an anti-martingale money management strategy you must earn the right to trade larger positions. With proper money management and consistent trading profits, you will be able to achieve your goals as a trader.

These 10 steps are a structured and practical approach that will help take you from where you are today, to where you want to be. Don’t’ skip any of these 10 steps! There are no short cuts here, but following this outline and approach will take your trading to the next level.

Happy Trading!
Mark Hodge
Head Coach, Rockwell Trading
club.ino.com/trading/2010/07/10-steps-to-becoming-a-trader