i. Two types of professional traders - institutional and retail traders.
ii. To trade for a firm you’ll need to go through the firm’s hiring process.
iii. To become a retail trader, you need to develop a trade plan and need to demo trade before going live.
With all the glamour and attention around trading, most people get attracted to taking up trading as a profession.
One might watch a movie in which a trader was shown, or might read an article or news report on how traders earn a fortune trading the financial markets. These are enough to spike interest in becoming a professional trader.
If you want to become a professional trader for the glamorous or lavish life and for the money, then you are just wasting your time.
Whereas if you want to trade professionally for the freedom it brings and the self-accountability aspect that comes along with it, then you will surely be successfully considered you put in the efforts in the right things.
Trading is a business completely based on merit. The efforts the trader puts in for preparation and proper execution will lead to success.
If you have had the thought on how to become a trader and participate in the financial markets professionally then hang on, this blog post is for you to read.
Who is a trader?
A trader is basically a person that participates in the financial markets in order to trade the various financial products that are listed and available for trading on the various exchanges that are situated and functioning around the globe.
Financial traders basically look to buy and sell financial assets with a bias of the value or the price of the asset to rise or to decline and to capitalize on the price movement.
These traders use a variety of methods for analyzing the markets and the price movements and take their trades decision based on them.
There are a plethora of financial assets that traders can effectively trade in the various markets, there are stocks, bonds, currencies, commodities, derivatives, and so on.
Types of traders
There are basically two types of traders, traders that trade on behalf of banks or funds, and traders that participate in the financial markets on their own and are not employees of a trading firm.
A trader at a bank or a fund is basically an employee of the said institution and trades the financial markets on their behalf. These traders are often given some sort of training before they begin trading live and have seniors that guide them in the process.
These traders are paid fixed salaries or bonuses from profits they generate for the firm or even both. These types of traders are also known as institutional traders.
The traders that are not affiliated with any firm and trade on their behalf are known as retail traders. These traders could be full-time traders that are dependent on the trading profits for their income, some may trade part-time while working a job somewhere else.
Retail traders are often self-taught traders that do not get the training that the institutional traders get. This doesn’t put them at a disadvantage as such but there is no denying the fact that the institutional traders do have better resources at their disposal as compared to the retail traders.
How to become an institutional trader?
You know that institutional traders are individuals that trade on behalf of a firm. These traders are trained and given all the resources, basic and advanced, that they can utilize in order to generate profits for their employer.
Since institutional trading is basically a job where the firm hires traders, the barrier to entry has a bit high, as individuals have to go through several hiring processes in order to get the coveted job.
1. Educational background
The large banks or firms prefer hiring the best of individuals for their trading desks as the profession is quite demanding. Institutional traders require certain educational qualifications that display their level of intellect.
Some firms may hire candidates from only a particular educational background, while some just require candidates to have a qualified college education.
Some trading desks of firms trade based on quantitative techniques, hence require candidates to have some level of technical education.
Educational qualifications may or may not related to the field, but once an individual completes a degree course it displays that he is competitive and is a person that can be taught and is eager to learn.
2. Interest in the profession
Educational background is not the only necessary criteria for institutional traders. Firms often look for whether the candidates actually know about the profession and are genuinely interested in it.
Candidates can choose to enroll and complete the various professional courses that are provided by financial institutions. There are courses based on general trading as well as on specific financial products that traders at the institutional levels trade-in.
Firms would test the knowledge of the candidates regarding the financial markets. If candidates are actually interested in trading they will have read a thing or two or will have been aware of the happenings in the markets.
Individuals aren’t required to display advanced levels of knowledge but rather just enough that shows that the candidate has taken efforts towards knowing about the profession and is genuinely interested in the field.
3. Prior experience
Firms do not compulsorily require candidates to have some practical experience in trading the financial markets but it certainly is an advantage. Candidates that have traded the markets show that they have some skin in the game and are keen on learning about the field.
Prior experience could be through a brief internship stint with a trading firm or even a broker, some candidates could have experience of trading all on their own.
Firms do not necessarily only look for candidates that are already profitable but rather they look for candidates that can be taught and are committed to performing.
Having prior experience related to trading can teach the individual a lot about the professions and these learnings can very well help them in their institutional trading career.
Educational qualification, interest in the profession, or prior experience in trading is all worthless if the candidate does not possess any of the skill sets or characteristics that are essential for the trading profession.
Skill sets here do not mean that the candidate must essentially know how to trade the markets and what setups or strategies are to be applied according to market conditions.
Firms rather look for skills such as pattern recognition, quick learning, quick calculations abilities, staying calm under high tension situations.
Some skills can be taught while some can't. There are characteristics of resilience and composure that traders require to possess which are not present in everyone.
Firms would conduct some tests in order to filter candidates on the basis of such skills.
Lack of such skills does not necessarily mean that the candidate is not at all suitable for trading, but when these firms hire they look for a candidate that fits in a structure.
Different firms may have different requirements and candidates can always apply at other firms or may develop these skills and approach the firm again.
The path to becoming an institutional trader is not an easy one as I have discussed the various hiring processes they have to go through.
This is a job just like any other where candidates have to prove that they are better than the person sitting next to them.
How to become a retail trader?
A retail trader is an individual that trades solely on his own and is not employed or affiliated with any financial firm. These traders participate in the financial markets risking their own capital.
Retail traders could trade the financial markets full-time or even part-time and are often self-taught. They may not have the advanced resources that are available to the institutional trader but they are their own boss as they are not employed by a firm.
These traders would depend completely on profits made in trading for their livelihood or may trade the markets for additional income.
Since retail traders are not given any structured formal training, their journey of profitable trading is not easy. Retail traders have to learn the skill on their own by putting in the time and effort.
Traders often enroll for courses or short-term training that are available out there, which in turn costs them money.
The barrier to entry for retail trading is not as high as there is no hiring process or tests that individuals have to go through to get accepted. Individuals can take their time in learning and practicing the skill.
1. Market selection
The first thing that retail traders have to figure out is the market they want to begin trading in. There are many financial markets with numerable financial assets to trade, this includes the stock market, commodity market, currency market, bond market.
Since retail traders are all on their own, they have the liberty of choosing their target market. They can research about each market and then take a decision.
They do not have to compulsorily trade in one market all the time, but can always choose to participate in several markets.
Each market has its own driving forced and characteristics. Retail traders must figure out the mechanisms of each market before they decide to stick with one. This will allow them to be prepared holistically.
2. Personality check
Each individual has his own distinct personality and characteristic. It is often said that no two people are the same. What works for one person may not work for the other person.
It is essential for traders to determine their personality type, it is important they dive deep and evaluate their behavior and qualities. This is important as it will reflect the manner in which they will behave in the markets.
Traders can choose to trade the markets using a plethora of strategies and setups. These strategies are of different levels, some require longer monitor time, some require less time to be spent in front of the screen, some require fast execution, and some don’t require quick executions.
In short, every strategy has some requirements, the trader must choose only those strategies that align with his personality and in which he has complete confidence.
3. Find a broker
This might seem trivial but in reality, finding a good and reliable broker is very essential in a trader’s journey. Brokers are basically the intermediaries between the trader and the financial market.
Traders place their buy or sell orders for the assets they seek to trade through their brokers.
Brokers can either make or break trades for the trader. The quality of a broker will directly reflect the quality of the trading experience of the trader.
Brokers are basically providing service to their clients, hence it is always better to find the best broker with the best services. Putting some time to research this will be beneficial in the long run.
4. Full proof plan
By a full-proof plan, we mean a proper trading system. A trading system is comprised of a good trading plan, a good risk management system, and a proper mindset.
A risk management system is the amount of risk that the trader can bear when he is in trades, it is the amount that the trader is comfortable losing in case his analysis was wrong and incurred a loss on the trade.
Before taking a trade or during trades, it is essential for traders to be in the right analytical mindset. They must not allow emotions to take over and must stick to their trading plan.
All these components make a full-proof trading system. These are all subjective i.e. depends from person to person. A trading system is an essential aspect for professional traders as this is what will earn them profits and hence they must stick to it without fail.
Whenever institutional traders are hired, they are first given basic training and education about the market they will be trading in and then are given time to practice on a simulation of the market.
This allows them to apply and get adept at the methods they were taught.
Spending time to practice is never time wasted. No profession be it any field, became one without practice. The same is the case with trading.
Since retail traders do not have anyone to hold them accountable while they trade, they have to ensure that every trade decision they take is of the highest quality. This quality will be achieved only after time is spent practicing.
Institutional trader or retail trader?
There are pros and cons on both sides and before you take the leap, you have to list them out and decide which one will be better for you.
Institutional trading is just like a job where you will have to go to an office and you will have a team of traders and a boss. Here, you will be allocated capital from the firm’s funds and you will be taught everything you need to know to start trading and generating alpha.
While in retail trading, you are completely on your own. You have to figure things out on your own and will also need some capital to trade.
But not everyone can become an institutional trader. You might have a job already and you want to take up trading for generating additional income. In such scenarios, retail trading is your only option. But do not take this as a setback or a disadvantage.
Like I mentioned earlier, you have to understand what each role brings to the table, and then you have to decide what fits you.
This blog post was just for this, I wanted to introduce you to both sides of trading so that you are in a better place to make an informed decision for yourself.
What type of trader are you?
Are you a retail trader or do you trade for a firm? I’d like to know.
Also, let me what markets and what kind of strategies you trade and maybe we could have a healthy chat about it.
Share this blog post with others and let them also know the options that are there in trading and how to become a professional trader.
You can always reach out to me through the comments section for questions or queries and I will get back to all.