Have you ever wondered how to become a stock trader? Well, as a full-time trader for over 5 years, and a lot of wins and failures, I have compiled a list of ten steps to help any aspiring trader get started and build their foundations properly.
I’ll cover each tip step-by-step in the below ‘trader checklist’ and point you in the right direction for further reading on each topic, to really drive it home.
10 steps to becoming a trader
- Educate yourself
- Choose a market
- Find a profitable strategy
- Pick your broker
- Know your way around the demo
- Buy trading and charting software
- Work out your financial situation
- Start trading and collect data
- Build your trading journal
- Trade and never stop learning
Use the links above to jump to each section.
1. Educate yourself
One of the biggest mistakes anyone wanting to learn to trade can do is to jump right in without doing the work first.
Any financial market is a competitive one. They all have serious professionals backed by heavy bankrolls, and all are out to win.
The market doesn’t owe you anything. Educating yourself will take time, but trading is a skillset that can be learned. If you blow your account before you’ve even started learning to trade properly then this will set you back.
My book How To Make Six Figures In Stocks is free and can be downloaded below. It covers the UK stock market, its mechanics, and the various levers and tools available to private investors.
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Enter your email to receive my free “How to Make 6 Figures in Stocks” ebook with everything you need to start investing in UK stocks.
2. Choose a market
You should decide what market and assets you want to trade once you’ve done your research.
Some example markets:
- Foreign exchange (FX)
For some reason, forex is often chosen by many new traders. This could be because of all the forex scams saying how easy it is to make money (no market offers easy money, sadly) but also because you can get started with less than £100. Margin is used in order to get large exposure.
I trade UK stocks for several reasons:
- The UK stock market offers world-class businesses and opportunities to make money
- It is easier to understand and learn
- The UK stock market is inefficient meaning that if you do the work you can get ahead, therefore it is easier to grind out an edge
However, you realistically need at least £5,000 to start and an absolute minimum of £4,000.
This is because starting with lower amounts of capital is not economically feasible.
First, you need a proper broker (we’ll cover that later in this article). Proper brokers do not offer “commission-free” trading. Often the fees are hidden elsewhere such as sloppy execution – or execution at the end of the day!
Brokers such as IG Markets and Hargreaves Lansdown are the two largest in the UK. IG is the broker that I use for all of my online execution and IG charges £8 per trade (though this drops to £3 for frequent traders).
Therefore, a buy and sell will set you back £16.
If your position size is £500, then trading commission has cost you 3.2% of your position! If you trade three times and break even, you’ve still lost nearly 10% of your capital purely on paying to deal.
If you move your position size to £1,000, then trading commission as a percentage of your position drops to 1.6%. This is still a lot but it is manageable.
When £1,000 is your minimum position size, you need a trading account that can hold several positions and where taking a bath on one position won’t have too much of an effect on your overall account.
For example, if your trading account is £2,000, and you lose 20% on your £1,000 position, then your total account loss is 10%. Two or three more losses and the trading account would be down significantly.
If we have a trading account of £5,000 and take a 20% loss on our £1,000 position, then we’d only be losing 4% of our trading account.
This is still large but it is possible to start trading successfully with £5,000. As you progress and scale up, trading commissions decrease as a percentage of your account and you can also afford to take on less trading account risk, meaning that the headwinds against you become lighter.
TIP: Use my position size calculator to figure out your ideal position for each trade.
3. Find a profitable trading strategy
Once you’ve chosen your market you need to find a profitable trading strategy.
My free UK Stock Trading Handbook (below) offers plenty of tips in building a strategy and there are two patterns I trade: the breakout and breakdown.
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Enter your email to receive my free UK stock trading handbook, packed with professional techniques to manage risk and consistently profit on AIM stocks.
No trader is the same and there are various types of trader and trading styles.
Intraday traders (day trading) are looking to open and close positions within the same trading session and not carry over any risk.
Day traders need to be psychologically resilient (read my guide on trading psychology) as this type of trading has the least successful rate, and it also requires full time attention.
Swing traders can be part time and will look to capture medium-term moves, and trend traders will be looking to ride the trend until the bend at the end. Swing trading suits those who have a busy schedule.
You should pick the strategy that allows you to spend the hours trading you that you need and that most suits your lifestyle.
To find your own strategy and backtest what works best you need to test this on historical price data. You don’t need to bean analyst here – we’re looking at technicals rather than fundamentals.
I use SharePad in order to look at the price action of UK and US listed equities and look at what has worked in the past.
You can input your own technical analysis tools and customise as to how you want it.
4. Pick your broker
Picking your own broker is important, which is why I’ve written an entire article on choosing the best online stock broker for your needs.
I recommend IG Markets as I use this online broker for all of my online execution.
The advantage of IG is that it offers Direct Market Access (DMA). This means you can place trades directly onto the order book and work better entries and exits.
To see exactly how to do this you can look at the walkthrough in my Level 2 guide.
Another advantage of IG is that it is competitive on rates with trades at £8 and frequent trades at £3.
There are no extra fees for ISAs and the £24 custody quarterly fee is removed for those that deal two times in a quarter and more – the equivalent of one open and closed trade in three months.
5. Know your way around the demo
Another advantage of IG Markets is that it offers a demo account. Many brokerage firms offer these and this means you can trial the platform and get to grips before trading with live markets in a live account.
You can also practice your strategy before deploying it for real. This can show up glaring issues in your strategy which will only cost you demo capital rather than your hard-earned cash.
However, whilst demo trading can be useful, it cannot replace trading for real.
There are no emotions in demo accounts. Making money on these trading platforms is easy. Everyone can make money in demo accounts and sell stocks because nobody feels any pain or excitement when seeing large losses and large wins.
Once you move over to real trading, emotion incites traders to be risk-averse and take profits quickly and run losing positions to avoid being wrong. This is exactly the opposite of what successful traders should be doing.
You have to ask yourself: do you care about being right or about making money? If it’s the latter, leave your ego at the door and keep a check on your emotions and how you’re feeling.
6. Buy trading and charting software
Every trader needs charting software. It is impossible to trade without a package that offers various trading tools such as accessible and quick information, and historical price data.
I use SharePad which offers the following features and more:
- A wealth of fundamental data in one place
- Powerful charting tools and technical analysis suite
- Alerts and alarms for specific prices and events
- Filters to find specific setups and the ability to create my own filters
- Level 2 and live prices (in the Pro version only)
- Watchlists and stock tracking plus a portfolio feature
SharePad is for traders who want to do more with less time.
It offers me an informational advantage because I can quickly filter for what I need and monitor existing positions and potential stocks I want to get involved with.
You can take a risk-free trial (worth up to £69) and a free month on me with the link below:
7. Work out your financial situation
Before you start trading it is crucial to assess your financial situations. Losses are an occupational hazard of doing business and you need to be comfortable with your financial situation.
Trading is the hardest sport on the planet. People have literally killed themselves because they have failed in this business.
I have personally had a message from someone who had lost all of his partner’s savings and hadn’t told her. I’ve heard stories of people getting excited and losing the house deposit on a single share. Do not underestimate how difficult trading can be.
To prepare yourself for success, work out how much you can set aside as trading capital and how long you can give trading before quitting. It’s no use spinning your wheels for years putting more and more money into the account as a net loser.
Give yourself an amount to lose before you quit. Set some money aside so that if you lose more than expected your financial situation will not be a problem.
8. Start trading and collect data
Once you’ve completed the first 7 steps then it’s time to start risking capital and step into the ring.
Start small, trade your plan, and collect data.
Data collection is necessary because if you don’t know where you’re going wrong then how can you expect to fix it?
I have had people email me that they haven’t made money in years, and when I ask them to send a list of their last 50 trades I never hear back.
This is because they’re either embarrassed to do so or because they don’t have a list. Very often it’s easy to see why traders don’t make money just by looking at their recent P&L.
I once heard a story from Rolf Schlottman that one trader had emailed him and hadn’t been profitable in five years. Rolf asked the trader if he realised that if he stopped taking one specific trade then he’d be nicely profitable.
This is why data collection is so important for traders.
9. Build your trading journal
Building a trading journal will document your journey as a trader. With the data collected you’ll be able to see what you’re doing well and what you’re doing badly.
Here are some things to look out for:
- What are your best types of trade?
- What are the commonalities between your biggest winners?
- What are your worst types of trade?
- What are the commonalities between your biggest losers?
- Are you entering properly and not chasing entries?
- Are you exiting positions when you’re supposed to as defined in your plan?
- Are you getting slippage on positions?
- If so, can you do anything about it or do you need to change broker?
Trading journals should be kept by every trader. For more information on creating and using a journal, read my full guide on recording trades with a simple trading journal.
10. Trade and never stop learning
Trading is a continuous process in learning.
What works today might not work tomorrow. For long periods, one strategy may not work before it suddenly comes into fashion again. You need to have good psychology in order to see these periods through.
You should constantly be trying to improve your trading. In forex trading, it is a zero-sum game. This is because the forex market uses currency pairs, and so forex traders who win must see an equal amount of losses for other traders. Hedge funds will relentlessly focus on making money.
If you’re not working on your edge, you risk being outcompeted by the market.
Kodak didn’t adapt to digital cameras.
Nokia didn’t adapt to the iPhone.
If you don’t adapt, you will not survive.
Get started in becoming a trader
If you want to trade UK stocks and become a serious trader, then my UK Stock Trading Handbook will help you get started. It covers various concepts such as risk management, position sizing, advanced stop placement, and more.
However, you need the motivation in order to continue when you have setbacks. Trading is not easy, but if you are determined to keep learning and improve your processes then you can become a successful and money-making stock trader.