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You're not a day trader and you'll probably lose big time if you try to be one right now, Australia's financial regulator has warned

Jack Derwin
·4-min read
  • Australians have been warned off day trading stocks by the financial regulator ASIC.

  • The watchdog said it had seen a huge rise in short-term speculative trades since volatility swept the market in March.

  • As the Australian economy teeters towards a recession, ASIC warned this kind of activity was "likely to lead to heavy losses – losses that could not happen at a worse time for many families".

  • Visit Business Insider Australia's homepage for more stories.

You're not the Wolf of Wall Street, ASIC has reminded Australians in what might come as a major shock to the country's newly-minted day traders.

While the Scorcese film of the same name may have glorified the exploits and fortune of ex-con and former penny stock trader Jordan Belfort, your average punter would be well-advised to stay away from short-term stock trading, the financial regulator advised.

"Trading frequency has increased rapidly, as has the number of different securities traded per day, and the duration for holding the securities has significantly decreased: indicating a concerning increase in short-term and ‘day-trading’ activity," ASIC said in a paper published on Wednesday.

"We found that some retail investors are engaging in short term trading strategies unsuccessfully attempting to time price trends."

Just as it's no surprise a Leonardo Dicaprio role catapulted Belfort into infamy, nor is it that incredible stock market volatility, and relatively cheap valuations, has seen some try their luck at making a quick buck.

To be clear, however, there's a giant difference between buying and holding companies long-term and trying to get rich quickly by capitalising on the current day-to-day swings in stock prices. The slow and steady approach carrying far less risk than the latter.

"Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge," ASIC said.

"For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families."

Certainly with more than a million Australians out of jobs and the unemployment rate to hit decade-long highs, now is not the time you'd want to bet the farm on a hunch the market's simply got it all wrong.

Given there are around 3.5 times as many new Australian traders entering the market right now, and a mass reactivation of dormant accounts, it appears there are plenty risking their money and wading into the market despite this economic uncertainty.

In fact, the analysis ASIC conducted of recent short-term trades tells you all you need to know.

"The analysis suggested few pursuing quick windfalls were successful. During the focus period, on more than two-thirds of the days on which retail investors were net buyers, their share prices declined the following day. On days where retail investors were net sellers, their share prices more likely increased the next day," it said.

More worrying still is the fact punters are diving into complex products like contracts for difference (CFDs) – essentially pure price speculation. Those delightful things, banned in the US for a reason, resulted in more than $234 million in losses for traders in a single week in March.

The fact sports have all but disappeared from TV screens and stadiums around the world might have something to do with the uptick in day trading – read: betting.

The itch to gamble on something, anything, might be too compelling for some even if it is the earnings of a gold miner you've just heard of instead of Malaysian table tennis tournaments.

Or speculating on the second-quarter results of small-cap biotech with a vague plan for a coronavirus treatment in lieu of Mexican greyhound races.

Or a feeling investors might have overlooked one of Afterpay's smaller competitors, in the same way Leicester City was in 2016.

No matter. Maybe it's time you took ASIC's well-intentioned advice, bought and held the index and went back to watching grand final replays until this thing blows over.

Disclaimer: This article contains general information only and is not intended to be used as personal advice.

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