A guide on how to be a super trader that covers the best strategies, recommended materials, how to develop your own trading plan, and a risk management guide.
The financial market offers unlimited opportunities to savvy investors. There are thousands of stocks, currencies, commodities, ETFs, indices, and other derivatives to trade or invest in. With all these financial vehicles on offer, there are many ways to make money. The likes of Warren Buffet have made their living by buying and holding stocks for decades. While others, like Ken Griffin and James Simmons, have made it by buying and holding financial securities for a short while. Others have made a living using strategies like private equity, event-driven strategies, and speculation. This article will look at a number of ways you can be a better trader.
A passion for financial markets
To be a successful teacher, you need to be passionate about teaching. To be a pilot, it is important for you to have a passion for the aviation sector. Similarly, to be a trader, you need to have a passion in the financial markets. This is because, as a trader, you will spend tens of hours every day staring at charts or watching financial news. Without this passion, you will not have fun doing it and ultimately, your chances of succeeding as a trader will be very limited.
No one is born with an interest in financial markets, we all want to be astronauts and firemen. However, you can develop a passion for the markets by training yourself. You do this by reading financial magazines like Bloomberg Businessweek, Forbes or even this blog and watching financial television networks like CNBC and Bloomberg. In your free time, read books about finance or about people like Buffet who have had a lot of success in the financial industry. Finance is such a wide sector, there are many ways to discover an area you can get passionate about.
Learn before you start
The worst what you can do on your way of becoming a Forex trader is skipping your classes. Most of the beginners fail cause they don't take time to learn and understand the financial industry. When the first few trades lead to profits, they grow confident and double down to only lose their money at the end.
The best thing you can do before you start trading is to learn. Fortunately, there are many books, websites and video courses on trading that you can find online. A good place to start is in Warren Buffet’s website which will give you access to all his annual investment letters. These letters will help you gain insights from one of the greatest investors of all time.
Another source of excellent trading and investment videos is YouTube. Here, you will find people explaining how they trade, the lessons they have learnt and the tips they apply in the market.
Taking time to learn will help you discover how the market works. It will also help you create your own trading strategy.
Come up with a strategy
There are thousands of strategies that you can use to be a successful investor. For example, investors in the hedge fund industry use the following strategies:
Long only: this is a strategy where the investors involved buy stocks and other financial securities and hold them. They profit when the price of the securities move up.
Short only: this is the opposite of the long only strategy. In it, the investors specialize in finding overvalued stocks and other securities and shorting them. In shorting, they borrow stocks, sell them at the market prices, keep cash, and buy the same amount when the price drops. A good example of this kind of investor is Jim Chanos who profited from the fall of Enron and Lehman Brothers.
Long-Short: these are the investors who buy the undervalued stocks and sell the overvalued ones. They profit when the undervalued stocks move up and the overvalued stocks move lower.
Arbitrage investors: these are investors who specialize in finding the pricing problems of securities. For example, in merger arbitrage, the investors buy the stock of the company being acquired and short that of the acquiring company.
Macro investors: these investors focus on the macro issues in the global economy. For example, if they believe that the Emerging Market (EM) economies will do well, they invest in EM stocks or their currencies.
Algorithmic Investors: these are also known as High-Frequency Investors. They use complex computer algorithms to analyze and initiate orders. A good example of this is James Simmons who has consistently generated more than 30% annual returns in his Magellan Fund.
Traders too can also apply these strategies. For example, the long-short traders focus on buying currency pairs they believe will move up and sell those they believe will move lower. They can also use algorithms and arbitrage trading strategies.
Broadly, traders can use these strategies based on the duration:
- Day traders: these are traders who open and exit trades within a day. Scalpers who open and exit trades within a few minutes are in this category too.
- Swing Traders: these open and leave trades overnight for a day or two.
- Long-Term traders: these leave their trades for a few days or weeks.
To become a better trader, you need to take time to define the type of trader you are and the assets you will be trading.
Practice
To succeed as a trader, you need to spend a lot of time practising. Fortunately, many brokers offer a free demo account. This is an account that has everything you will need to trade using virtual money. This is a very important step you must do if you want to succeed in the industry.
There are a few things you need to do when using a demo account. First, you should use the demo account with the exact amount you intend to start trading with. For example, if you intend to start with $3000, it is wrong to start a demo account with a million dollars.
Second, your demo account should have the same leverage that you intend to use in the live account. If you intend to use a leverage of 30:1, you should create a demo account with the same ratio.
Third, while the demo account has virtual money, you should assume that it is real money. In this, you should feel the pain of losing the money.
In addition to this, you should participate in trading contests. These are competitions where you compete with thousands of other traders with the goal of winning a prize. Participating in such a competition will help you gauge your skills and measure your performance. If you win, it will give you good seed money to get started. We especially recommend checking Supercharged 2 Real Contest and Champion Demo Contest.
Risk management
Risk management is a very important step when you trade. Without it, you can be the best trader or investor but suffer big losses. A good example of this is with the famous activist hedge fund manager, Bill Ackman. After profiting from his investment in Valeant Pharmaceuticals, he watched his investment go south. When he exited, he had lost more than $4.4 billion. Similarly, during the financial crisis of 2008/9, many hedge fund managers closed their funds because of the heavy losses. Therefore, if these veteran Wall Street managers can lose money, so can you. There are a few things you can do to minimize your losses.
- Leverage: while many brokers offer leverages of up to 500:1, it is recommended that you use a small leverage ratio. This will reduce your risk per trade.
- Volume or lot size: the bigger the volume of a trade, the more risks you expose yourself to. Therefore, you should always use a small lot size. While the profits will be small, small lot sizes will help you exit major mistakes with small losses.
- Stop loss: a stop loss is a free tool that allows you to stop a loss-making trade at a pre-defined level. This level is defined by the risk-reward ratio preferred by the trader. In your trading strategy, you should take time to identify the ideal risk-reward ratio.
- Trailing stop loss: this is a stop loss that is more flexible. It moves along with the chart and locks in the profit. As a result, in case of a reversal, your profits are locked in.
- Emotions: when you make a big loss in a trade, your emotions will likely tell you to open a trade in the opposite direction. Having a trading plan in place that tells you when to enter or exit a position will help you avoid mistakes made from impulsive trading based on your emotions.
You can succeed
Many people currently make a living off the financial markets. You too can make it if you are passionate and focused about the industry. If you feel that you don’t have the time to invest in learning and trading for yourself, there is still another way you can participate in the markets. This is when copytrading steps in – here you can copy trades from experienced professionals and receive a stable income from a diversified portfolio.
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