There's a rush of mum and dad investors who are punting on the ASX amid the COVID-19 market shakeup – and most are losing money!
The trend is alarming enough for the Australian Securities and Investments Commission (ASIC) to issue an unusual public health warning.
The wild gyrations on the S&P/ASX 200 Index (Index:^AXJO) is proving too tempting for those stuck at home with nothing to do. The ASX has turned into the new social gaming app of the day!
I am not here to tell you how to spend your money or debate about whether you should or shouldn't be spinning the ASX like a roulette wheel. I supported my family by day trading for over three years in a previous life.
But those wanting to, or have jumped, into day trading should know how professionals make a living from short-termism. This could help lower the chances of you being the 80%+ of day traders who get wiped out.
To be sure, this article doesn't necessary apply to long-term investors who aren't driven by turning a buck in a tight timeframe.
Also, the list below isn't meant to be detailed or exhaustive, but is meant to get you thinking about three broad areas as a starting point.
Funding your trades
Where you are getting your capital to fund your trades sounds obvious. But there are a few things that many novice punters overlook.
You should never trade with your living expenses. If a losing trade means you can't feed your family or pay your bills, you have no reason to trade or even invest.
Another thing you should do is to ensure you have separate accounts for your living expenses and trading. Do not use accounts that allow instant money transfers either.
You should also think about whether you use leverage to fund your trades. This could be a margin loan or buying share warrants. Until you have a track record of trading successfully, I would avoid using leverage.
Again, if you have to use leverage to start trading, you aren't ready.
Behind the scenes
The thing that often separates success and failure is back-office processes. At the very least, day traders will need to keep a log book and an accounting spreadsheet to reconcile their accounts at the end of every trading day.
The log book details the reason why you've entered and closed every trade, along with profit/loss date/time stamps and other details. This allows you to review what's working and what's not.
Using a log will also force you to think through each trade carefully before pressing the "buy" button and will stop you from making impulsive decisions.
And at the end of each trading day, it's important to mark-to-market all your open positions and tally your crystallised profits and losses. You should have a constant snapshot of how you are performing.
Tools for the frontline
The vast majority of short-term traders use technical analysis to work out what to buy or sell. This involves identifying pattens on charts and using a multitude of indicators or signals to predict turning points.
There are plenty of resources you can use to work out what works for you, but there are two key things that most punters overlook during this process.
The first is back testing. Once you have a system you think works, you should see how accurate those buy and sell signals are on a range of ASX shares you plan to trade over a past few years.
The second is risk management. This needs to work in conjunction with your trading system so you know when to hold and when to fold. Again, there are plenty of books and information on the web on how to manage trading risks.
Just make sure you got yours down pat before your first trade.
