There is a specific process to becoming a successful trader.
If you don't follow this process, you have almost no chance of success…and that's why about 90% of new traders ultimately fail.
So if you're willing to put in the work, but aren't sure how to proceed, then here's the roadmap.
This is the time-tested method that has worked for countless successful traders throughout history.
Follow these steps to become a successful trader:
- Learn the basics of your market.
- Pick a strategy that appeals to you.
- Create a trading plan.
- Backtest your trading plan.
- Forward test your trading plan.
- Journal your trades and improve.
- Start trading live.
Now that you know the basic steps, let's dive into the details.
Learn the Basics of Your Market
The first step is to learn the basics of the market you're going to trade.
This means learning things like:
- What is being traded (currency, shares of stock, etc.)
- How to place a trade
- Transaction costs
- Loss/gain per minimum price movement
- If you can place both long and short
If you're interested in trading Forex, take this beginner's course.
I'm working on guides for other markets, but the concepts are similar in other markets.
Do some Googling and check out the fantastic videos on YouTube. There is a lot of great information out there.
Once you know the basics of the market you want to trade, it's time to learn some trading strategies.
Trading strategies are methods of trading a market that can include: technical analysis, fundamental analysis, or a combination of both. There is no single best trading strategy, all that matters is what works best for you.
So take some time to examine a few different trading strategies.
When I first started, it wasn't easy to find information on trading strategies.
I had to buy some fairly expensive books if I wanted to learn.
Now there are tons of great strategies on the internet for free.
Again, do your own research and find resources for trading strategies.
Pick a Strategy That Appeals to You
The next step is to pick a trading strategy that appeals to you.
Many new traders want to find the perfect or most profitable trading strategy.
If you insist on trying to find such a strategy, then you're in for a long and painful trading journey.
This is a ticket to ride on the trading silodrome.
In reality, the best strategy will be the one that you understand the best, and matches your strengths/beliefs.
Yes, your trading strategy has to match your beliefs about the markets. If you believe that you'll make the most money in trends, then you'll have a difficult time trading a non-trend strategy.
Likewise, your strategy also has to match your strengths.
Some people are good at reading charts. Other people are better at analyzing fundamentals like earnings reports and balance sheets.
Pick a method that you like and makes sense to you.
If you want to learn more about which trading strategies match specific personality types, then read this.
Create a Trading Plan
Once you find a trading strategy, it's time to create a written trading plan.
Most of the trading strategies on the internet are NOT trading plans.
A trading plan has specific rules for entering, managing and exiting trades.
In other words, you need a complete plan that will give you everything you need to place trades.
If you take a trade and you have any doubt as to how to enter the trade, manage the trade or exit the trade, then you DO NOT have a trading plan.
So before you can become a successful trader, you need to have a written plan.
Learn how to create a complete trading plan in this article.
Backtest Your Trading Plan
You now have a trading plan.
This is further than most traders get, so take a minute to give yourself a pat on the back for a job well done.
But don't get too comfortable yet. This is where the hard work really begins.
Now take your trading plan and backtest it completely. When I say completely, test it on as much historical data as possible.
There's a common myth on the internet that backtesting a trading strategy 100 times proves that it works.
This is not necessarily true.
Watch this video to figure out how many backtesting trades makes sense for your situation.
Now that you understand about how many trades you need to feel comfortable with the results of your strategy, let's get into more details about the backtesting process.
You can learn how to do your first backtest here.
One final word before I leave the backtesting process…
A common backtesting mistake is to change your trading plan in the middle of the test.
Do not do this, otherwise you won't get reliable data on your trading strategy.
It's like a doctor mixing blood samples from 2 different patients together and doing a test on the mixture. He won't be able to tell which patient has the problems that he sees in his test.
So the best thing to do is to complete your current test. Then if you want to change the rules, create a NEW trading plan, then do an entirely new test.
Doing this will help you find a profitable trading strategy faster.
Forward Test Your Trading Plan
Once you have a trading strategy that is profitable in backtesting, you're not done yet…
You still need to figure out how well your strategy works in real-time.
Many traders skip this step and this is another reason why so many traders fail.
So once you have a trading strategy that is profitable in backtesting, it's time to test your trading strategy in a demo account.
This is very important, so I'll repeat that. You want to do this in a DEMO account.
Backtesting is great, but it's sped up a lot.
You'll need to have some patience when you're demo trading in real-time.
By demo trading, you're getting closer to real world trading conditions and this allows you to see how well you execute your trading plan.
Learn more about how to Forward Test here.
Get Into the Habit of Journaling
While you're Forward Testing, the most important thing to do is to journal your trades.
Again, if you don't journal your trades, you'll have very little chance of success. This is because you need to figure out what you're doing wrong and what you're doing right.
Only journaling can show you these things.
Your journal doesn't have to be fancy.
Some traders geek out about having the perfect trading journal.
My advice is to start simple.
Just use a simple marble notebook, like you used in elementary school.
…or whatever works for you.
You can also use the following tools:
Now what are you going to be writing in your journal?
Here is some valuable information that you should put in your journal:
- Open and close prices of each trade
- Edits or trade management to did while the trade was open
- Reasons for taking the trade, editing the trade and exiting
- Trade open/close screenshots
- Intuition on how the trade will work out before you open the trade
- Trading strategy you're using
- Post-trade analysis
Again, don't make it too complex. Keep it simple and you're more likely to do it.
Finally, it can also help to journal trades that you missed.
Start Trading Live
Many traders jump into live trading right away and they wonder why they lose money.
Once you've honestly gone through all the steps above, it will give you maximum confidence to trade your strategy.
Only jump into live trading when you're confident that your strategy has a high probability of working in the real world.
Also make sure that you're able to execute your strategy consistently and you have addressed all of your issues related to trading psychology.
Going through the above process will also give you the historical data to understand if your strategy ever stops working.
Again, do NOT jump into live trading until you've done the previous steps and you're confident in your skills and your trading strategy.
There is a strong temptation to jump straight into live trading.
DON'T DO IT.
Follow the entire process and you'll have a much, much higher probability of success.
Final Thoughts on Becoming a Successful Trader
Many new traders think that they can learn a trading strategy in a weekend and they will become a consistently profitable trader for the rest of their life.
Nothing is further than the truth.
Just like with any other skill, there is a learning process that needs to be followed in order to become successful.
You have to practice for hours to become a good basketball player and you have to go to school for years to become a doctor.
Trading is no different. It might not take as long to become a successful trader, but you have to be willing to put in the work.
That's the roadmap.
Now get to work.