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Becoming a Professional Stock Trader

There is one clear and notable difference between professional traders and beginners. The pros have a "realistic" outlook (some might say expectation) of how much money they will earn from trading stocks.

By contrast, the markets also lure an increasing number of new traders into the industry - with varying degrees of outcomes and success stories.

What it Takes to Make Trading a Profession

The lure seems to offer newcomers a promise of incredible riches with minimal input of time and effort – and in a short space of time.

To prove a point, there are few industries and careers that offer workers the chance of turning a few thousand dollars into a seven-figure account.

This is the part where we burst the bubble. The expectation of making it big through stock trading happens only for a select minority.

Pro Tip: It is wrong to view stock trading as a replacement for the consistent income created by a job. Trading is a business!

How Much Do Professional Traders Make?

Before we explain more about the actual process of becoming a professional stock trader, let’s look at how much you can expect to make.

Even though this day job sounds like a great trade off, the top professional traders will average less than 20% in profits per year.

So, if the best fund managers are realizing gains around twenty percent per annum (as an average), what about retail traders?

Diving in a little deeper:

A comprehensive answer will depend on several key factors. Besides the general strategy, it will also depend on things like risk management and trading timeframes.

Some of you already know about striking differences between day trading and long term investing. For example, it is not uncommon for a successful day trader to make a lot more than 20% over a period of twelve months.

Even so, and despite that statement being true for some trading gurus, it does not constitute the whole picture – and nor should it! To prove a point:

  • Professional stock traders average less than 20% profit per year.
  • The average return for Warren Buffet (e.g. Berkshire Hathaway) is around 14% a year (beating the S&P 500 for the last 50+ years).

Note: The main section contains more information about trading stock markets as a business and how to set up passive income streams.

Things You Need to Know about Day Trading

The first important factor to consider about day trading is that it is not scalable. In simple terms, percentage returns are going to decrease as fund sizes increase.

Professional stock traders average less than 20% profit per year.So, why is that?

Trading larger amounts means you may start to ‘move’ the markets. As a result, there will be a greater likelihood of suffering extra slippage when entering and exiting your trades.

Day trading with a five or 6-figure account has a smaller effect on the market. But, you start to ‘become’ the market with anything larger. As such, diminished returns will be the most likely outcome.

High Opportunity Costs of Day Trading

Let’s suppose your job in the workplace brings in around $50,000 per year. But, because you want to become a professional stock trader (e.g. start trading for a living), you hand in your notice and quit your day job.

Next, let’s surmise that you realise a profit around $25,000 in your first year of trading. OK, some would view it as a positive – and good news. But, how wrong is that summation?

In real terms, staying in the workforce would have increased the opportunity of earning the extra $25,000. Thus, being brutally honest, the likelihood of beginners making a decent living in the early years of trading are slim.

Note: Most trading platforms (e.g. eToro) issue a disclaimer stating around 90% of traders will lose money when trading the stock market. The statistic also suggests that the number of losers decreases to 80% over time, 10% will break even, and a mere 10% will actually make money on a consistent basis.

Day Traders Become Slaves to the Markets

One popular question that most day traders want answered is… how many hours a day should I expect to work as a professional stock trader?

Our research, as well as personal experiences, suggests it will be something in the region of 12 to 15 hours per day.

Let’s break it down:

  • Doing research before the market opens – 2 hours.
  • Trading the session – up to 8 hours.
  • Trading reviews and journaling (keeping a book) – 2 hours.

Hence, a young and energetic person in their 20s or early 30s should not have too much difficulty meeting those time constraints.

But, someone in their 60s, or busy people with a family, might consider it as being an unwelcome challenge to their management of time.

Trading Tip: You don’t actually get paid by the hour in this industry. Instead, rewards come from doing things correctly and repeatedly. Simply put, never lose… either win or learn!

Make sense? Then let’s move on…

If you are going to start a profession in day trading, these extra nuggets of wisdom (e.g. tips and tricks) should help you prepare well:

  • Setting aside at least two years of essential living expenses (outside of your trading capital) means you can still pay the bills if things don’t go as planned.
  • Trade in the same manner as you would with a new business venture. Very few businesses expect to make big money in the first few years. You should view stock trading in the same vein.
  • Keeping some trading profits secure (e.g. outside of stock trading platforms) means you have prepared well for the next drawdown should it occur – and it will.
  • Always be honest with yourself. Knowing when to call it a day and quit trading is not cowardice. It’s being responsible!

The Importance of Excelling in Mental Capital

It may surprise you, but one thing needs even more protection than the financial capital that you trade with. Yes, all professional stock market traders possess it – and in abundance.

Let me explain that better:

Blowing up your trading account is pretty serious right? But, it may not necessarily be the end of your career. It is not unreasonable to assume that some would be able to top up the account (e.g. with new money).

But… Losing your mental capital almost definitely means that the game is over. So, what exactly is mental capital?

Simply put, the level of your mental capital will determine your alertness and your drive to carry on with the ‘fight’ to win big.

Here are three good examples:

  1. A trade is in a drawdown. One of the first responses is to consider closing it. But, having a strong mental capital can help you follow the trading rules that you set up. Doing so, often means you can allow it to run as planned and play out your edge.
  2. It’s a trader’s mental capital that drives them on and motivates them to seek additional knowledge (e.g. when trading strategies lack an edge).
  3. US stocks tanked and you suffered a bad trading day. It’s normal to question your resolve and purpose. But, you are more likely to stay focused, and come back stronger, if you have good mental capital.

Nonetheless, even though psychological positives create strength, it is not uncommon for traders to lose some of it in part – or completely.

There tends to be several common ways of losing this mental capacity, with varying outcomes:

  • The fear of losing money results in you being afraid to move forward and place the next trade.
  • A lack of direction shows itself as a person with little or no confidence (especially in relation to trading strategies).

Trader’s Tip: No matter how successful you have become, you could lose it all in the very next trade. Always remember that!

Five Steps to Becoming a Professional Stock Trader

The main objective of this guide is not to promote any one method or strategy over another. Instead, we focus on delivering useful information and thought-provoking intellect.

That being said, our in-depth research suggests there are five key areas to concentrate on if you want to become a professional trader – and profit from your efforts.

1. Choose a Reliable Trading Methodology

There are four (4) types of trading styles or strategies. The one you choose is likely to depend on your long term goals and time commitment.

  • Scalping (minutes)
  • Day trading (intraday)
  • Swing trading (several days)
  • Position trading (months)

It’s important to differentiate the intricate nuances in the trading styles of successful traders. But, studying their strategies can help you learn some of the essential attributes that all consistently profitable traders possess.

The next step is learning as much as you can about the strategy that best suits your personal circumstances.

Here’s how:

  • Read books and magazines
  • Search Google
  • Follow Twitter posts
  • Watch YouTube videos

2. Develop and Enhance a Trading Plan

What is a trading plan? In simple terms, it is a set of rules that contain the general details of the strategies you will use to trade (e.g. the bond markets).

A comprehensive trading plan should define:

  • The time frame used for entries and exits (e.g. swing traders usually use the 4 hour or the daily time frames).
  • Specific markets being traded (e.g. equities, foreign exchange, futures, options).
  • The amount being risked on a trade (experts suggest a maximum of 1%). Using proper risk management techniques is a way of tracking how much a losing trade could cost.
  • General conditions of the setup. Hence, will you be trading with the trend (bullish or bearish), within a specified range, or both.
  • An entry point, such as on a breakout of resistance or after a pullback.
  • The stop loss (the point to get out of the trade if it goes against the original plan).
  • An exit point for the winners. Assuming the price moves as per the plan, it is important to have an exit strategy and take some chips off the table (e.g. profits).

3. Execute Trades with Consistency

The value of practicing with a virtual account should never be underestimated. But, when it’s time to take your plan to a live account, it is best to start small.

Stock markets can only move in three directions – up, down, or sideways (ranging). As a result, the execution can only result in one of five outcomes:

  1. Big win
  2. Small win
  3. Break even
  4. Small loss
  5. Big loss

Thus, your chances of becoming a success and profitable trader increase dramatically when you take number five out of the equation.

4. Record Trades in a Trading Journal

Reviewing your profit and loss is a helpful exercise, and it can be motivational, but it won’t help you to make improvements. In general, some of the key metrics that you should record in a trading journal will include:

  • The date that you entered the trade and which time frame you used.
  • Which markets you are trading and which setup triggered the entry.
  • The size of the position held and the direction (e.g. long or short sale).
  • At what price did you enter and exit and where did you place the stop loss.

5. Review Your Trades and Strategies

It is important to review whether the trading strategy that you are using is giving you an edge in the markets. Thus, having executed at east fifty trades with consistency, you can check how things are going using a standard expectancy formula:

Expectancy = (Winning % * Average win) – (Losing % * Average loss) – (Commission + Slippage)

Your trading strategy is most likely providing you with an ‘edge’ if your results show a positive expectancy.

Conclusions about Being a Professional Stock Trader

The path to becoming a professional trader should not be underestimated or taken lightly. So, here is a brief summary of the most important points to absorb.

Not all professional traders work for banks or represent hedge funds. There are some very successful individuals trading the stock market and making a small fortune by doing so.

It is more important to focus on the actual process than the results. Furthermore, expert traders are realistic about the expectations.

Traders who protect their mental capital are more likely to be successful than those who don’t.

Note: We always appreciate constructive comments and feedback. We have opened this article for discussion and will respond to any questions about trading at a professional level.

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Note: Learn more about what it takes to become a professional trader in this short video presented by Rayner Teo.

Stock Trading as a Profession and Career in United Kingdom