Trading stocks, futures, options, and other securities gives you a shot at creating wealth. It might seem easy – download a trading app, sign up, and start buying and selling. But real success in trading is anything but simple.
To become a successful trader, you must possess a unique set of skills ranging from analytical thinking to rational decision-making. We’ll help you march towards the goal with this article on how to become successful trader.
The Meaning of Success in Trading
Success in trading means consistently making profitable decisions while managing risk.
It involves developing a well-defined strategy and maintaining emotional discipline during good times and bad.
That said, your online trading success is not solely measured by financial gains but also your ability to learn from losses and adapt to changing market conditions.
Then there are financial indicators such as the growth of your trading capital through profitable trades and the magnitude of losses.
What Makes a Successful Trader?
The honest truth – you can’t be a successful trader without a strong trading plan. A plan isn’t enough, it has to be resilient, robust, and adaptive.
You could say that your trading plan will be your guiding map or a set of heuristics to help you travel through the terrain of the stock market.
If you want to know how to become successful trader, then creating a reliable trading plan is your core blueprint.
1. Trading System
The first thing someone asks when they enter a new world is – where are we going? Similarly, your trading system is the answer to your “where are we going”.
A well-structured trading system includes reference points for where you are, where you need to be, and where you could be. This includes:
- Selecting the right financial instruments
- Analyzing technicals and/or fundamentals
- Developing profit and loss targets
- Identifying entry and exit points
You could add more things to this list such as different types of orders to have a clear sense of direction and milestones.
2. Risk Management
The big one – managing risk. You see, risk is a part and parcel of being a stock market trader.
Just as the sun rises every morning, your trades are prone to risk every day between 9.15 AM to 3.30 PM.
We take precautions to protect against the sun – sunscreens, hats, umbrellas, etc. Similarly, you must incorporate tools for managing risk.
The first tool is knowing your risk appetite. Start by assessing how much you’re willing to lose per trade, and how you’d react to potential loss.
Then move on to fix how much of your capital you’re willing to risk on a single trade.
This ensures that no single trade can wipe out your entire account, and is known as position sizing in the world of trading.
Once all of this is clear, be absolutely strict with curbing losses by utilizing tools such as Trailing Stop Loss.
Assess the potential reward against the risk in every trade. Aim for favorable risk-reward ratios to ensure that potential profits outweigh potential losses.
3. Emotion Control
Incorporate emotion control into your trading system. Set clear entry and exit rules to prevent impulsive decisions driven by emotions like fear or greed.
Building a resilient trading psychology ensures you make rational choices, enhancing your trading success.
The most successful traders are rational, they don’t let emotions cloud their judgment.
You won’t see the cream of the crop engaging in revenge trading or adopting a high-risk strategy like the Martingale system immediately after a big loss because their ego is hurt.
Just as they do, even you must understand that emotional discipline is a cornerstone of successful trading. And it is non-negotiable.
Markets are constantly changing. What used to work in 2020 may not work in 2023. It’s likely that your system will be just as outdated as a fax machine in 2024.
Thus, a strong trading system should include guidelines for adapting to different market conditions as and when time and markets progress.
This flexibility can help you stay profitable in varying scenarios. Should your trading plan always change? Not really. But it should have room for change.
Striking this balance comes with experience, accumulated over months and years of studying the markets.
5. Record Keeping
Your plan can also include a section for keeping detailed records of your trades. This data is invaluable for analyzing your trading decisions over time and making informed adjustments.
Regularly review and adjust your strategy based on your findings, and never shy away from being honest with yourself about how a trade went.
An honest analysis will help you identify gaps in your trading system and can safeguard your capital by encouraging rational, calculated decision-making regardless of the market conditions.
Speaking of record keeping, you can use a Trading Journal which acts as a repository of your daily and monthly trading activity.
Importance of Technical and Fundamental Analysis
Technical and fundamental analysis can play crucial roles in your trading journey. Think of them as two sides of the same coin.
Technical analysis helps you assess past price movements and patterns, guiding your entry and exit decisions using technical indicators, drawing tools, etc.
On the other hand, fundamental analysis delves into the financial health of the assets you’re trading, focusing on factors such as earnings, news, and economic indicators (e.g. Buffet Indicator).
Combining both gives you a comprehensive view, making more informed choices and reducing risks.
These analyses are like your trading compass, guiding you toward profitable opportunities and helping you steer clear of potential pitfalls.
Remember that your journey to becoming a successful trader is your own. You have the freedom to choose between technical and fundamental analysis.
Some traders focus solely on one type of analysis while others find success by blending both. The key is to understand what can work for you.
Choosing Your Trading Style
Choosing the correct trading style is crucial to trading success. Your trading style determines your market approach and asset selection. Different trading styles have different characteristics:
1. Day Trading
If you want to know how to become a day trader, it means you’ll be buying and selling assets within the same day. Day trading demands constant attention during trading hours and involves high risk due to intraday market fluctuations.
2. Swing Trading
Swing trading, your second option, involves holding positions for several days or weeks. You’ll aim to profit from short-to-medium-term price swings. It demands less daily attention than day trading, making it a moderate-risk choice.
3. Position Trading
Position trading involves holding onto investments for a longer term, sometimes weeks or months.
It’s less demanding time-wise, allowing you to check the markets less frequently and focus on fundamental analysis for potentially lower-risk, long-term gains.
Scalping involves making quick and small trades to profit from tiny price changes. It demands your full attention & rapid decision-making and often results in numerous trades throughout a single day, aiming for small gains.
Psychology of Successful Trading
Belief in yourself and your trading system is crucial for success in trading. In this, trading psychology plays an important role for you to stay on track.
Three emotions drive the mindset of traders: patience, fear, and greed. To succeed, you must control these emotions:
- Avoid self-doubt and impatience. Sticking to your system is vital; prematurely exiting trades can cost you profits.
- Don’t chase the “perfect trade.” Fear can keep you sidelined. Trust your system, trust yourself, and take action.
- Guard against greed. Following your system prevents you from holding on too long and risking profits. Stay disciplined.
Why to Learn, Un-learn, Re-learn?
Learning, unlearning, and relearning are like keys to a treasure chest on your growth journey.
First, you learn new things to gain knowledge and skills. However, as the stock market is dynamic, you must unlearn outdated ideas or habits that no longer work.
This creates space for fresh, relevant knowledge. Relearning is the final step – it means adapting and embracing new ways of doing things.
In a fast-paced world, being open to this cycle helps you stay current and successful.
So, always keep these keys handy, and you’ll unlock many doors to personal and professional growth.
Becoming a successful trader is about mastering how to trade and be consistent in the market. Consistent in terms of profits, risk management, and psychology.
It is a skill that you can learn with hard work and persistence, and you can for sure position yourself for success with the right trading system.