Day traders learn to fly, not to leap
Published in the Australian, February 2010
by Katherine Jimenez
Experts say traders need a plan, some cash, and a good mentor
For more than two years, Nalan Glass has been a stay at home mum. Keen to make and build money, Glass last year took her first stockmarket punt: a $5000 investment in a small non-descript bio-tech company.
"Instead of putting the money in a term deposit, we thought let's put a little bit of it in shares and have a look at what happens," she says.
The punt worked and what started out as a hobby has today turned into a fully fledged trading career.
Glass is one of many ordinary Australians who have left their jobs or turned what was once a hobby into a trading career after studying the share trading education offered by Wealth Within.
For others, it was the global financial downturn that spurred them on to take greater control of their investments.
Jim Berg, private trader and author of The Share Trading Handbook, says: "It's certainly true that people want greater control and so they should.
"It's a fact that a private trader can do every bit as well as a professional."
The rewards can be high, with some traders earning thousands of dollars a week just by buying and selling things like shares or options, but in a high stakes game the losses can be equally big.
CommSec estimates it now has about 5000 active day traders on its data base, with a growth spurt experienced in the past six months.
The majority of CommSec's traders are male and aged between their late 20s to early 40s.
Commsec's head of distribution Brian Phelps says they tend to concentrate their trades on small to mid capitalization stocks and they tend to be very liquid shares.
Day traders like mid-cap mining stocks, he adds, dabble a bit in banks and rarely leave their positions open overnight.
If you want to get started, the message from the experts is have a strategy, keep it simple, understand what your risk is, have some cash to back you up and, importantly, have a good mentor.
Finding a mentor is the first thing you should do, says Berg, who has been a trader for more than 20 years.
"The easiest way to learn to trade is to find someone who knows what they are doing, who has some experience," he says.
“They will show you the companies they choose to trade ... they will show you how to get in, how they manage the position and when to get out."
Having a plan is paramount, he stresses. "What the plan does is to help to take the emotion out of trading."
The most important criteria for buying, he says, is not the price earnings ratio or earnings per share but rather" is it [the share price] rising".
Berg has a number of rules he follows when buying.
One is: "the way you get out is more important than when you get in."
Wealth Within investment analyst Janine Cox agrees.
"The selling part is often the thing that people struggle with the most, she says. They know when to buy but not when to sell a stock," she adds.
Another important component to trading at the start, she points out, is understanding money management.
By that, Cox means, how much money you have to invest, risk profile and your limit of risk on any one trade.
Wealth Within runs a diploma course, which teaches would be-traders the rules and techniques of trading.
Buying books was not enough, she cautions.
To get started, all that is needed is an ordinary PC, a trading software package; Wealth Within recommends Market Analyst, and a trading support product, such as a data set, which provides end-of-day trading figures or live day trading numbers.
Would-be traders are advised to spend at least a few hours a week in front of the computer, researching, analysing and trading.
Berg suggests starting off with a cash position of about $20,000 and spreading your portfolio across eight to 10 companies in four different industry groups.
"The reason why you are doing eight to 10 is because of volatility," says Berg, who in March will release his new book Shares to Buy and When, outlining the top 110 companies that have the potential to outperform over the next 12 months.
"If you only have one company, you are going to have pretty high volatility." He is most upbeat about the infrastructure and mining services sectors.
Wealth Within advises picking from the top 50 or 100 listed companies in the market.
The most common mistakes would-be-traders make, experts say, are not doing enough research, not having enough trading education, or not knowing when to exit.
Berg, who describes his style of trading as a combination of "fundamental and technical analysis", strongly suggests buying a charting software package, which helps identify trends in share price movements.
He says starting off as a day trader was dangerous and suggests instead to take more of a longer term approach to trading in the beginning.
CommSec runs a package for its clients. As well as a trading platform, it offers trading tools such as IRESS (equity information system), charting capabilities, support service and other products. The cost of an internet trade starts from $19.95 per trade.
Other online trading houses are E-Trade Australia, Macquarie Bank; Nab Online Trading and Bell Direct.
While the appeal of day trading is strong, Cox advises people not to pack in their jobs straightaway.
"The idea is to be actually learning while you have got an income," she says. "That will allow you to get confident to a point when you can do it."
Tools of the Trade
Get educated: Find a course or a good mentor
Get a good software package
Develop a strategy and keep it simple
Have some cash behind you
Don't leave your job to become a trader, learn while you still have a full-time income coming in
Understand your risk tolerance