If you are thinking of buying a day trading software system or attending education seminars on day trading in the stock market, there are some risks you need to consider. Don’t rush to sign up. Invest with your head, not over it.
What is day trading?
Day traders try to make money from making lots of trades within a short time frame. They do this by taking advantage of small price movements in shares and other investments.
Day trading systems are trading strategies, systems or computer programs that generate a signal directing when traders should buy or sell shares and other investments. Day trading systems can be for any sort of investment including shares, foreign exchange and derivatives.
Every day millions of shares and other investments get traded on Australia’s markets by companies and private individuals. Those who lose run out of money and cannot keep trading.
For any new trader, the first few years are the toughest, and there’s a high failure rate as the market sorts out those who know what they’re doing from those who don’t. In this respect, share trading operates like other businesses, like trading cars or antiques. It demands skill and ability.
A day trading strategy is not ‘long-term investing’. Long-term investors buy shares and other investments with the goal of building wealth over time.
Spending lots of money on software does not guarantee success despite what the glossy sales brochures suggest.
- Be cautious of promoters who encourage day trading or sell day trading systems that advertise easy profits with minimal risk. Take the time to research and make sure you completely understand what day trading involves.
- Watch out for ‘churning’. Churning happens when the provider encourages you to make lots of trades. With every trade you pay a commission – so churning generates more commissions for the provider or broker.
Make sure you aren’t ‘churned’ by the provider to increase their profit at your expense. Be sure to understand how the provider makes money from your trades and how the trading system works generally.
- Only commit if you have lots of time to devote to trading. Professional traders spend many hours every day studying the market. Even then, professionals find it difficult to consistently make profits from day trading. Ask yourself if you have the knowledge and time to compete with them.
- Always keep track of the cost of trading. Day trading fees add up quickly. Remember you will be paying fees every time you make a trade – whether you make money or not.
- Only use day trading systems if you can afford to lose the money you put in. These systems can cost thousands of dollars – can you really make that back?
- Check the promises made to you by promoters. The advertised performance of day trading systems may be based on simulated or hypothetical trading, not actual trading results. Don’t take impressive looking graphs and projections on face value. They may not factor in costs such as commissions, spreads and real (actual) pricing, or the cost of buying the system or training.
Investing between the flags
Before investing time and money in risky day trading software, it pays to remember the essential principles of investing between the flags.
Whether you’re looking at day trading or any other type of investing, you’ll be on the right track towards making safer and wiser investing decisions, if you:
- identify your individual goals and timeframe;
- understand your investing style and tolerance for risk;
- be aware of the trade-off between risk and return;
- only invest in products you understand; and
- know the importance of diversification and asset allocation.
Download a copy of Investing between the flags at www.fido.gov.au/publications.
See www.fido.gov.au for more practical tips on things to consider before buying share trading software and warnings on scams and frauds. The Australian Securities Exchange website www.asx.com.au also has useful guides explaining various investments.
Tony D’Aloisio BA LLB (Hons)
Australian Securities and Investments Commission