How to become a Professional Trader
29 June 2022
Becoming a professional trader is challenging but can be hugely rewarding. As a professional trader, you’ll be working for a financial company or institution, aiming to profitably trade your chosen instruments and contracts. This requires a wide range of skills and disciplines alongside commitment and dedication.
This article will guide you on how to become a professional trader, covering the following sections:
1. Starting out – progressing from the basics
2. Trading strategies
3. Creating a track record
4. Professional traders – the working day
5. Staying resilient and disciplined
6. How to measure success as a professional trader
1. STARTING OUT – PROGRESSING FROM THE BASICS
Do you have the right skillset for a trader? Is professional trading right for you? Only you can answer these questions, and it’s critical to be honest. The kind of basic skills and characteristics you’ll require include literacy and numeracy, resilience, confidence and an analytical mind.
It would be impossible to list every aspect of professional trading here, but some key considerations are listed below.
DETERMINING WHO YOU WANT TO WORK FOR
Make sure you’re familiar with the various types of company and financial institutions that populate the professional markets. These include investment banks – “I-Banks” – that employ proprietary traders. “Prop” traders trade using the bank’s capital, and often specialise in a particular asset class like equities, metals or FX.
Funds also employ professional traders and fall into two broad groupings – pension funds and hedge funds. Pension funds tend to invest relatively conservatively with a medium to long-term time horizon. They’re not seeking “fast bucks” but rather place their funds into relatively stable investments offering a reliable return.
Hedge funds use the capital provided by investors to trade in the markets, which can be anything from Fixed Income to Credit to Commodities. They can specialise in a specific part of the markets or be more “global” in focus.
Industrial companies may also employ traders and dealers. Oil firms may have teams of dealers specialising in energy markets, while multi-national producers of processed goods may employ commodity traders. Such examples offer interesting opportunities for aspiring professional traders.
There are also specialist trading groups that employ professional traders who focus on specific financial instruments like options. Often these areas require a more specific skillset – in the case of options, a higher level of statistical ability.
DECIDING WHAT YOU WANT TO TRADE
Professional trading comes in all shapes and sizes. Are you best suited to short-term trading or longer-term investment? Do you want to trade simple, linear instruments like futures or more complex, non-linear instruments like options?
Which markets and asset classes do you favour? An asset class is a group of tradable products with similar characteristics. Some of the best known and heaviest-traded asset classes include:
• Equities and Stock Indices – individual shares and stock indexes like the S&P 500
• Foreign Exchange aka Forex – currency pairs such as GBP/USD
• Fixed Income & STIRs – bonds and Short-Term Interest Rate products
• Commodities – hard (metals) and soft (agricultural, fibres, etc.)
• Energy – oil, gas, emissions, etc.
There are more specialist classes and sub-classes – but this covers some of the most significant groups of products traded in the financial markets.
UNDERSTANDING WHAT MAKES PRICES MOVE
Prices in financial markets move in response to numerous factors including supply, demand and sentiment. Professional traders have come to analyse the markets in two basic ways – fundamental analysis and/or through technical analysis.
Fundamental analysis involves studying real-world factors that impact supply and demand. For financial asset classes, these factors may be predominantly macro-economic things like economic data or Central Bank policies. For products like commodities and energy, factors such as weather and seasonality may be significant.
Technical analysis (TA) involves the study of market price action, usually though charts. Within TA, there are a huge number of techniques and studies that can be applied but all with the same aim – to predict where the price is going. Many professional traders, particularly shorter-term traders, are purely technical.
As an aspiring professional trader, you need to develop an understanding of these forms of market analysis. Different approaches suit different people – you need to build an idea of which best suits your character and skillset.
TRADING FOR YOURSELF
Many aspiring professional traders start by trading in relatively small size with their own capital. This is a way of getting used to trading before entering the competitive world of professional markets.
Discipline and objectivity are still essential, even with relatively small trades, but valuable lessons can be learned from mistakes at a relatively low cost. Accounts can be opened with modest sums, but be aware that losses hurt, regardless of size.
KNOWING FEES AND COSTS
All trading comes at a cost. There are obvious costs, such as brokerage fees, and less obvious ones like bid/offer spreads. Brokerage and trading fees vary but, generally, economies of scale apply to trading just as to any other area of business.
Trading costs tend to be relatively large when trading in small size – and vice versa. One of the key advantages enjoyed by OSTC traders is that the company can negotiate competitive fees, reducing the crucial “tick to cost” ratio.
Another key consideration is the competitiveness or width of the bid/offer spread. If the prices you’re entering and exiting trades are uncompetitive, you’re paying another cost, albeit one that may not appear immediately obvious. Again, professional traders tend to focus upon markets where the bid/offer spread is competitive and narrow, usually because the contract in question is popular and highly liquid.
DEVELOPING KEY SKILLS
Numeracy and literacy are critical skills for traders. Simple arithmetic numeracy is an essential for all professional traders and, if you want to become an analytical trader, employing statistical and perhaps algorithmic techniques, a higher level of mathematical knowledge is required.
Literacy may not appear as important but remember that reading and analysing reports and articles will form an important part of your daily routine. The more efficiently you can take in financial information, the better. Happily, anyone can practice this skill. Reading the financial press, looking online for interesting articles and listening to relevant media will help.
PLANNING AND RECORD-KEEPING
Professional traders approach the market in a structured and methodical fashion. They have a plan and stick to it. As a neo-trader, you’ll be experimenting with different approaches. Make sure you keep a detailed record of your thoughts, ideas and actions.
Create a trading diary, fill it with anything that’s relevant to your trading. This will include all information relating to trades you execute. Details like your reasons for trading, choice of instrument, entry and exit prices are all important for future reference.
It’s also worth recording your state of mind, mood, energy levels – all these can be invaluable in determining the best approach to the markets.
Above all, be honest. Making mistakes is inevitable – the key thing is to learn from them. Don’t rewrite history to make yourself feel better. Be objective and analytical – that will serve you best.
2. TRADING STRATEGIES
Every professional trader’s approach is unique. Each has their own way of analysing data and distilling it into their strategic approach.
It would be impossible to list every factor that enters the strategic thinking of professional traders but below are some of the better-known strategies employed in the markets. As you build experience, you’ll learn important lessons, allowing you to hone your technique.
Shorter-term professional traders are often known as “day-traders”: traders who tend to enter and exit positions over short timeframes and “flatten” their open positions overnight. Getting into and out of positions quickly and frequently is known as “scalping” – exploiting short-term trading opportunities.
Just like other types of professional traders, day-traders are likely to use TA to identify key price levels, trends and price patterns. Charts can be used for any timeframe and day-traders will use charts for relatively short timeframes, perhaps hourly or daily.
There are many different types of price action that are significant, but key ones include:
1. Breakouts – occur when the price breaks either up or down after a period of sideways movement. Traders normally look for significant volume to accompany a breakout – the volume is viewed as a confirmatory factor.
2. Price reversals – traders look for specific patterns to suggest a change of market direction is imminent – such as double tops (or bottoms) and head and shoulder formations. Again, the accompanying volumes will be carefully studied for confirmation.
3. Retracements – when a trend reverses, traders often look for key percentage retracements of the original move. Both 50% and 61.8% (known as a Fibonacci retracement) are of interest.
This is a small selection of the myriad techniques and signals available to day traders. As ever, do your research, listen to more experienced traders and find out what’s right for you.
EVERYONE IS DIFFERENT
Different strategies appeal to different traders and different types of analysis will suit different mind-sets. Everyone has their own tolerance to losses, their own level of risk aversion. It’s critical to be honest with yourself, including about your weaknesses.
Do your research. For example, futures trading and options trading are very different disciplines demanding different skillsets. One isn’t better than the other but recognising the different requirements is important. Trading comes in many shapes and forms – find what’s right for you.
PLAN TO REACH YOUR GOAL
Professional traders approach the markets in a planned and structured way. Apply this to your goal of becoming a professional trader.
The point of research is to figure out which areas of professional trading are right for you. To establish yourself in one of these roles is your goal.
Once you’ve set that goal, plan for getting there. Put the various stages in place – give yourself time to thoroughly cover all the steps needed to get to your goal. In short, approach your quest to becoming a professional trader in the same way pro traders approach the markets. Make a plan and stick to it.
Keep a record of your progress – honesty and objectivity are key. Accept there’ll be setbacks and use them as experiences to learn. Stay resilient, stay committed to your goal.
At OSTC, our courses can support you in every stage of your development as a professional trader.
3. CREATING A TRACK RECORD
Professional trading is a numbers game. The ability to make money consistently is a core skill of professional traders. The same principle applies to becoming a trader. The importance of maintaining a trading diary is highlighted above. A key element of that diary is your profits and losses.
One sensible and practical step in developing as a trader is to “paper trade”. Paper trading allows you to test strategies and approaches and keep a performance record.
WHAT IS PAPER TRADING?
Paper trading means writing trades down rather than executing them. The obvious advantage is you can’t lose real money, but you must understand that paper trading is very different from the real thing. It’s far easier to make unemotional decisions when there’s no monetary risk. Nonetheless, paper trading is a useful exercise for anyone learning to trade.
PAPER TRADING – LOGGING TRADES
There are various ways to paper trade. You can simply write potential trades down in your trading diary and track them – recording important details like entry and exit levels, profit or loss, etc. This may be your first stage of paper trading, before you start accessing systems and platforms. It’s simple, effective and cheap.
PAPER TRADING SYSTEMS
A more advanced paper trading method is to open a “demo” account. Demo accounts allow you to place trades into the market as if they were real. You do everything the same way as if you really were trading – but without the financial risk.
Often the functionality and appearance of these systems is identical to the “real thing”, allowing neo-traders to become comfortable with systems before committing to the markets. Some systems replicate the market in real-time while others use historical price data. Trading games and competitions are sometimes staged in this environment, allowing neo-traders to compete and “gamifying” the trading experience.
Various companies facilitate demo trading on their platforms including well-known market names like Stellar and TT (Trading Technologies).
PROS & CONS OF PAPER TRADING
The obvious benefit of paper trading is the ability to trade without real financial risk. It allows developing traders to try out strategies and approaches in relative comfort.
The downside is that paper trading is psychologically very different to the real thing. Taking real losses is harder. Understand there are real benefits to paper trading but trading for real is a step up, particularly from a psychological perspective.
IMPROVE YOUR KNOWLEDGE WITH OSTC COURSES
Your chances of becoming a professional trader are improved by practice and acquiring further knowledge. OSTC offers a range of courses designed to provide knowledge and experience in this highly competitive world.
Your choice, of course, will depend on your existing knowledge and experience. Our courses include:
These are ideal for those just starting out in trading.
These two courses are perfect for those with existing knowledge and experience who want to develop and improve.
4. PROFESSIONAL TRADERS – THE WORKING DAY
While there’s no typical trader, there are certain activities in common to most, if not all, traders.
Traders are always on the look-out for significant data and information. Even during down-time, traders identify useful information from the media. This is thrown into the mix, supporting the trader’s decisions in the following days.
Trading days can begin at any time because global markets are open 24 hours and different geographical markets and exchanges are busiest at different times.
THE ASIAN MARKETS
In terms of time, Asia is ahead of the UK, Europe and the US. Therefore, Asian markets often give early clues to what we might expect to see during our market hours. Significant Asian markets and exchanges include:
• Hong Kong Stock Exchange (HKSE) – open from roughly 9am-4pm local time, equating to roughly 2am-9am London-time.
• Tokyo Stock Exchange (TSE) – opens from 9am-3pm local time, equating 1am-7am in London. TSE closes for an hour over lunchtime.
• SGX – the Singapore Exchange – opens from roughly 8.30am-5pm, with an hour lunchbreak. This equates to approximately 1.30am-12 noon London-time.
THE US MARKET
US financial markets are some of the largest in the world. Depending upon the specific time-zone, the US is roughly 5-6 hours behind the UK and Europe, meaning their markets open around lunchtime in the UK and run into the European evening. Key American exchanges include:
• Chicago Mercantile Exchange Group (CME) – a long-established and highly significant derivatives exchange.
• InterContinental Exchange (ICE) – “younger” than the CME but hugely important, ICE started in the energy space but now lists derivatives on a wide range of asset classes.
• New York Stock Exchange (NYSE) and Nasdaq – two of the world’s largest and most important stock exchanges.
UK & EUROPEAN MARKETS
The London markets tend to open between 8am-9am and close around 5pm. Key exchanges include the London Stock Exchange (LSE) and the London Metals Exchange (LME). London sits conveniently between the Asian and US markets in terms of time-zone: just one of many reasons for their global importance.
Key European exchanges include EUREX, the German/Swiss derivatives exchange and Euronext, the Paris-based exchange. Europe is one hour ahead of the UK – insignificant for UK-based traders wishing to trade European markets.
CHOOSING THE RIGHT MARKET FOR YOU
Different markets appeal to different traders. Practical considerations like trading hours will play their part, but so will less obvious factors like instrument type (futures, options, swaps, etc.) and asset class (equities, bonds, commodities, etc.).
Liquidity is a hugely important consideration for professional traders. How easy is it to get into and out of positions? What about competition? Is there profit to be had in a market – or is it over-crowded? And fees will matter – that critical cost-to-tick ratio.
Your choice of market(s) will depend upon all these factors and more.
ENTERING YOUR CHOSEN MARKET
Once a trader has identified their chosen market and contract(s), there are several other important details to consider including:
• Trade or “clip” size – what’s your default trade size?
• Trading hours – not just when the market is open but when is it busy? When do you need to be watching most carefully?
• Liquidity – when is the market most liquid and competitive? Are there periods when liquidity thins or dries up?
• Expiry and contract cycles – are there days or weeks during the trading cycle that are particularly significant? Are the opportunities greatest at a certain time? When do traders start “rolling” their front month positions forward?
• Data releases – which economic data and information is most significant in the contracts you have chosen? When is this data released?
These are just some of the key considerations when entering a market for the first time.
HOW TO PREPARE FOR YOUR WORKING DAY
Regardless of which market(s) you decide to trade, preparation is paramount. Knowing your plan and being informed are important but so is mental preparation. Having the right mindset and being mentally prepared is crucial. Different traders are at their best at different times – and it’s important to be in the market when you’re at your best.
OSTC have developed a biometric app to help you optimise performance.
5. STAYING RESILIENT AND DISCIPLINED
The world of professional trading is challenging and highly competitive. Losses are inevitable so you’ll need to be resilient. Discipline is key – stick to plans and follow routines.
• Learn from losses – understand they are opportunities to develop and improve.
• Maintain a positive mindset – if things go badly, ensure you have suitable coping strategies.
• Enjoy the wins! – live in the moment and recognise when your plans have come to fruition.
Even the most experienced traders can learn something new. Never stop improving.
6. HOW TO MEASURE SUCCESS AS A PROFESSIONAL TRADER
Trading is a visceral business. It’s all about the numbers. So, what should a trader measure?
For professional traders, performance isn’t simply a question of profit or loss. Other factors such as risk and opportunity cost also enter the equation.
Of course, you need to make money. After all, that’s the whole point of being a pro trader. But the relationship between risk and reward is central to everything a trader does. Pro traders are looking to minimise potential risk while maximising potential profit. Traders are judged not simply on their profits but also upon the risk they took to make them.
Opportunity is also important. Traders need to ride out the hard times to ensure they’re ready to take advantage of better market conditions. Pro traders persevere when it’s difficult and “make hay when the sun shines”.
As a developing trader, it’s important to create an honest and objective record of your successes and failures. Seeing what worked and what didn’t can provide valuable insight.
1. How do I qualify as a professional trader?
There are various routes into professional trading. A degree in a relevant discipline helps but is far from essential. OSTC’s range of courses can help you gain the knowledge and experience you need.
2. How long does it take to become a professional trader?
This obviously depends upon your starting point. If you have little or no experience, you’ll need to start with the basics, before moving onto higher levels. Our Level 2 Course can take as little as four days to complete, while higher-level courses take up to four weeks.
3. When will I be ready to start trading professionally?
If you secure a trading position with a company, they will play a large part in deciding when you’re ready to start trading the markets. If you’re trading with your own capital, you’ll need to make an honest and objective appraisal of your abilities.
This is a delicate balance. On one hand, you should make sure you’re truly ready before risking real money. On the other, it’s not good to be fearful of trading. Do your preparation properly – make sure you’re ready – and take the markets on with confidence!
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