Getting into day trading has always been very appealing to the masses. Unfortunately though, it’s always been thought of as something that could be achieved overnight. Trading is hard work. It takes sweat, tears, commitment and discipline to be an average trader. Imagine what’s required to be a great trader?
Be under no illusion. You may be one of the 90% that dabble with trading, end up losing money and claim “It can’t be done”. There are many reasons as to why traders fail but that’s out of the scope of this text. The good news though, is that I will do my best to enlighten you with a step by step process that’ll give you a fighting chance to be amongst the 10% of successful traders.
I say this humbly. If you’ve landed on this article, consider yourself extremely lucky. Why?
Because I’m about to break down the trading game to a 5 step in-depth process. I can’t know how long it’ll take you to really understand each step, but the blue prints are here for those who take this seriously, and are ready to give up their time, money and comfort to achieve their trading goals!
Here are the 5 steps on how to become a better trader:
The key 5 steps on how to become a better, more successful trader:
STEP 1 – Trading goals & objectives
STEP 2 – Trading psychology
STEP 3 – Trading basics
STEP 4 – Trading Plan
STEP 5 – Trade Execution & Revision
STEP 1 - TRADING GOALS & OBJECTIVES
"SMART" Goals
If you’re serious about any profession regardless of what it may be, you need to set objectives. Without goals, how do you know whether you’ve succeeded or failed? Imagine watching a soccer game without any nets! How can the team win when there’s no where to score the ball?
Having no goals is just as bad as having unrealistic, immeasurable goals. If you haven’t heard the expression smart goals before, I’ll break it down. Smart is an acronym:
S: specific
M: measurable
A: attainable
R: relevant
T: time-based
An example of a smart goal would be:
I’d like to be making a recurring income of $350 per week in 6 months from my trading/investing activities
Another example would be
I want to turn my $5000.00 to $25,000 in 1 year trading 3 days out of the week
The way I see it is either you’d like to produce income by making trading your full time job, or working on increasing your net worth using an investing approach. The choice is yours. Once you make a decision, take the time to revisit and re-asses your goals and objectives on a quarterly basis.
KEY TAKEAWAY
Set "SMART" goals and review them quarterly
Your "WHY"
Another aspect of setting objectives would be clearly defining why you want to be trading? Is it money? Is it the freedom? perhaps being your own boss? What’s the driving force behind you wanting to start trading.
If your answer is to become rich, I implore you to stop. This may come off as harsh and distasteful, but it needs to be said (I wish someone had told me) which is why I’ll tell you.
Generally, someone entering the day trading arena wanting to become rich is already starting off with an immature mindset.
What other professions do people embark on for the purposes of becoming rich? If you say Doctor or Lawyer, then I’ll ask you how much work do you think it required for them to accomplish that feat? This is no different. Great traders who put in the time, effort and commitment will get rich, not because they’re “trading” but because they’re being the best at what they do!
Before you begin down this journey, find out your why!
KEY TAKEAWAY
Know your "why" and understand your motivation
STEP 2 - TRADING PSYCHOLOGY
Mindset & Emotions
Understanding that both success and failure start in the mind puts you leaps ahead of other day traders. If you don’t have a solid and positive mindset, stay away from the turbulent and volatile markets. This ties in strongly with how you handle emotions.
The markets are like a roller coaster, one minute you’re up the next you’re down. A strong mindset will allow you to control your emotions during the ups & downs of trading. On the flip side, if you allow your emotions to control you, you’ll lose heaps of money.
KEY TAKEAWAY
Strengthen your mindset & control your emotions through meditation or prayer
Discipline & Decision Making
In a world where nothing is guaranteed, I can guarantee that without strict discipline, you will fail at trading. In order to become a better trader, discipline is paramount. When you make a decision on the basis of thorough research and analysis, its discipline that won’t shake you to your core when markets aren’t sunny. In a way, spontaneous decision making is reduced when you have the necessary discipline to follow your trading assessment.
KEY TAKEAWAY
Decide to start or stop a habit & stick to it at all costs
Routine & Confidence
You guys have heard about automation? When you automate, things get done. Routine is the automation of the human being. With routine, things get done! There’s overwhelming power in routine. How? Routine breathes experience, and experience breathes confidence.
Confidence is what helps you stick to your unemotional assessment of entering and exiting a trade. When you’re monitoring a position and it’s in the red, your confidence gets rocked. A trader with weak or fake confidence will allow the moment to rule. In the roller coaster of the trading world, that spells disaster.
KEY TAKEAWAY
Create a systematic analysis routine and gain experience trading either paper trading or starting small
Risk Tolerance & Fear
Risk Tolerance is an investor’s ability or lack thereof to sustain potential losses. As a trader, its critical that you understand the amount of risk you can comfortably assume. Risk tolerance varies from person to person, but it is only you who can really know what your threshold is. There are a variety of ways financial institutions use to measure an investors risk tolerance. At the end of the day, it boils down to one thing: Fear!
Fear is a fascinating phenomena. How do you know whether its affecting you? Well, if you’re jumping in and out of trades without any rhyme or reason, it’s probably because you’re experiencing fear and lack confidence. It can also be because your trading a certain amount of money that you can’t afford to lose.
Discover your risk tolerance by any and all means necessary. This way you can trade at ease, and without the added stress.
KEY TAKEAWAY
Trade with what you can afford to lose! Discover the amount of financial loss you can sustain without it emotionally compromising your trading plan
STEP 3 - TRADING BASICS
Trading Process
If you’ve taken the time to read up and learn about trading, you’ve probably heard the terms, technical analysis and fundamental analysis. Now, as a seasoned and more experienced trader, you can put away the focus on fundamental analysis. But if you’re starting out, it’s a huge plus to understand and learn about the securities you’re trading. Why? Because they’ll give you the confidence required to stick to your trading plan.
Technical Analysis
- Observe and learn the securities behaviour before you jump in (focus on max 3 at a time)
- Day, week, and month highs & lows
- Previous & current months open and close
- Volume fluctuations
- Ask & Bid sizes
- Competitor’s price percentage fluctuations
- Highlight recurring bearish or bullish movements
- If the security you’re trading is a stock check the beta (it measures the stock volatility against the general market)
- Get pulse of general market direction through news & trading chat rooms
KEY TAKEAWAY
Be patient. Observe the securities you'll be trading to have a good understanding of their behaviour
Fundamental Analysis
- Find out whether the company is on a stable growth trajectory by reviewing the income statement, balance sheet & cash flow statement
- Find out overall growth of the sector & industry
- Observe how other markets are performing in relation to the markets you’re trading (i.e Bond markets & stock markets)
- Pay attention to government & economic policy
- Keep an eye on foreign affairs as this can impact FOREX traders quite significantly
KEY TAKEAWAY
Have a stronger footing when you enter and exit a position knowing its fundamentals
Trading Approach
At the start of this article, I said it’s hard work trading. Now you understand why hedge firms need so many employees to track different companies, sectors, industries, markets etc. Being a day trader is a full time job if it’s being done with a disciplined approach. Another important point is to diversify. Don’t fall into a romantic relationship with any security. Go where the volume is and protect your principal at all costs.
Penny stocks are high risk/high reward. I only recommend advanced traders dabble with those. Instead focus on blue chip stocks as a start!If you want to be a professional day trader, avoid high impact news announcements and any other distractions.
To sum the process up, find undervalued, fundamentally solid, highly liquid, high volume, boring stocks that you can jump in and out of once you’ve learned it’s behaviour. Use screeners to help you spot these gems.
KEY TAKEAWAY
The approach you use should include both technical and fundamental analysis of a security
STEP 4 - TRADING PLAN
Trading Plan Components
it’s vital that you create a trading plan. Without one, you’re driving blind. Think of a trading plan as a road map helping you to reach your desired destination. Your trading plan should address the following main points:
- Objectives & Goals
- Schedule & Routine
- Initial Capital & Risk-Reward Ratio
- Screening Criteria
- Strategy Used
- Trade & Risk Management
- Daily Review Notes & Performance Tracking
You can either create a template for yourself, or you could use an already created template. If you’d like to use our template, feel free to download at no charge.
KEY TAKEAWAY
Craft a trading plan that encompasses these points or download our free template
STEP 5 - TRADE EXECUTION
Trading Tools
The trading tools you use are just as important as the process, if not more. If you’re using a platform or broker that’s limiting your execution, stop now and change. Before you can worry about profitability, you’ve got to get your tools in order. Sometimes paying more in fees, but getting the right tools is the best way to go. All depends on what kind of trader you are.
Important to note that some brokers or platforms offer free paper trading services which could be extremely beneficial in familiarizing yourself with the tool or even trying out different strategies without losing your capital. I’ve personally recommended TradingSim to those looking to analyze their trading and try out different strategies on a simulator.
In order to become a better trader, you must also be journaling your trades. This is important for both your trading plan as well as for strategy review. Only way you’ll truly find out what’s working and what isn’t. A strategy may work for me, but not necessarily work for you. Through trial and error, you’ll gain the experience to know what works for you.
KEY TAKEAWAY
Get your tools in order whether it be screeners, platforms, brokers or journals before you begin trading with serious capital
Trade Execution
I’m going to stress on this because as any experienced trader knows, entering orders correctly and timely can make all the difference. Seconds matter! As previously mentioned, focusing on 1-3 securities will reduce the pressure of timely order entry while day trading. If you’re not already doing this, I suggest you adopt these guidelines if you plan to be a profitable trader.
- Generally Place Limit Orders
- Market orders should only be used if the security you’re trading is in free fall and you want out (according to your trading plan)
- Some advanced platforms offer a OCO order (one cancels the other) – if you’ve got this take advantage of this feature
- Use Stop-Loss orders according to your trading plan
KEY TAKEAWAY
Get in the habit of placing limit orders and setting stop losses as a way to reinforce discipline into your trading
Trade Monitoring
The most important action a day trader must take is monitoring. Why? I mentioned earlier that part of understanding a security would be to observe it’s behaviour. The way it trends or moves really gives you an idea of what kind of trading approach you can take with it. By having securities on a watch list, you’re positioning yourself to strike when the time is right specially considering you’ve been monitoring price dips.
Once you’ve made a move and entered into a position, you should be monitoring price action. Keep in mind that although charts are available, they are not indicative of future price movements. Changes in price are purely based on market demand and supply! Closely monitor the bid and ask sizes to get an impression of market direction.
If in your trading style, pennies matter than level 2 quotes would significantly help you. Level 2 quotes gives you insight into bid-ask sizes at various price points. Something you should strongly consider if you’re looking to use scalping style of trading.
There’s so much to say, but for the sake of staying on point, I’ll mention the use of price alerts. Price alerts are extremely underrated and can help traders keep track of securities that they otherwise may not have the time to track or monitor. When you’re focusing on a maximum of 3 securities to trade, these alerts can be like a wake up call to other movers and shakers.
KEY TAKEAWAY
Employ the use of price alerts, watch lists and level 2 quotes depending on your trading style
Trade Revision
In the trading plan supplied above (click here if missed), you’ll find a comments section for daily notes. Most people don’t review their trades after market closure or after they stop for the day. This is non-negotiable. You must question everything. Why did you make that trade and did it conform to your trading plan? If not, why did you enter the position?
This system allows you to double down on how the securities you’re observing closed as well as remind you to follow your plan.
If you’re trading for income stream, transfer the profits from your trading account into your bank account daily. Why? Because once you see the profits you made get deposited into your bank account, you start valuing the dollar a lot more.
KEY TAKEAWAY
Be disciplined and review your trades to learn more about your strategy and profits. Journal your trades, and change trading plan accordingly
Day Trader Summary
There’s no doubt in my mind that if you truly follow the above 5 key steps, you’ll not only become a better trader, but also become a more successful trader. You won’t master these 5 key steps immediately, but through the process you’ll begin to automate the steps subconsciously. Happy trading!
DISCLAIMER: This blog should in no way be confused for financial advice.
This is for information purposes only.
It is not intended to be financial advice, nor should it be taken as such.
Please consult a financial advisor for your specific situation.
