Trading with the system will dramatically increase your chances of making money in the market.
The next challenge is finding a day trading system that works. Today you have the opportunity to choose from more than 300 trading systems available. Unfortunately only 10% of them trade profitably.
10 Principles for Creating a Day Trading System
Few rules but easy to understand
It may surprise you that day trading systems have less than 10 rules. The more rules you have, the more likely you are to “complete the curve” of your trading system into the past, and such an over-optimized system is very unlikely to make a profit in real markets.
It is important that your rules are easy to understand and enforce. The market can behave very wildly and move quickly, and you won't have time to calculate complicated formulas for making trading decisions. Think about successful floor traders: The only tool they use is a calculator, and they make thousands of dollars every day.
Trade electronic and liquid markets
We strongly recommend that you trade on the electronic market as the commissions are lower and you receive instant replenishment. You need to find out as soon as possible whether your order was filled and at what price, because based on this information you plan your exit.
You may not place an outgoing order before you know that your inbound order is filled. When you trade the open (non-electronic) protest market, you may have to wait a while before you receive a replenishment. By then, the market may have changed and your profitable trade has turned into a loss!
When trading the electronic market, you receive a replenishment in less than a second and can immediately place your exit order. Trading your liquid markets can avoid slippage, which will save you hundreds or even thousands of dollars.
Make consistent profits
You should always look for a trading system that produces a nice and smooth equity curve, even if in the long run the net profit is slightly lower. Most professional traders prefer to take small profits every day rather than big profits every now and then. If you trade for a living, you need to pay bills from your trading profits, and therefore you should regularly deposit profits into your trading account.
Making consistent profits is the secret of a successful trader!
Maintain a healthy balance between risk and reward
Let me give you an example: If you go to a casino and bet everything you have on the “red”, then you have a 49% chance of doubling your bankroll and a 51% chance of losing everything. The same goes for trading: you can make a lot of money if you risk a lot, but then the risk of collapse is very high. You need to find a healthy balance between risk and reward.
Let's say you define “crash” as losing 20% from your account, and you define “success” as making 20% profit. Having a trading system with past performance results allows you to calculate “risk of collapse” and “opportunity of success”.
Your risk of destruction should always be less than 5%, and your chances of success should be 5-10 times higher, i.e. if your risk of destruction is 4%, then your chances of success should be 40% or higher.
Find a system that makes at least five trades per week
The higher the trading frequency, the less likely it is to experience month losses. If you have a trading system that has a winning percentage of 70%, but only makes 1 trade per month, then 1 loser is enough for a month to lose. In this example, you could be losing several months in a row before finally starting to make a profit. Meanwhile, how do you pay your bills?
If your trading system makes five trades per week, then you have an average of 20 trades per month. Has a 70% win percentage – your chances of winning the month are very high.
That's the goal of all traders: Have as many winning months as possible!
Start small and grow big
Your trading system should allow you to start small and grow big. A good trading system allows you to start with one or two contracts, and then increase your position as your trading account grows. This is in contrast to many “martingale” trading systems which require increasing position size when you are on a losing streak.
You may have heard of this strategy: Double your contract every time you lose, and one winner will win back all the money previously lost. It's not uncommon to have 4-5 losses in a row, and this already takes 16 contracts after only 4 losses! Trading the S&P e-mini, you need a minimum account size of $63,200, just to meet margin requirements. That's why the martingale system doesn't work.
Automate your trading
Emotions and human error are the most common mistakes traders make. By all means you should avoid this error. Especially during fast markets, it is very important that you determine your entry and exit points quickly and accurately; otherwise, you may miss a trade or find yourself at a loss.
Therefore you should automate your trading and look for trading systems that have or can be automated. Automating your trading makes it free from human emotions. The buying and selling operations are all automated, hands-free, with no manual intervention and you can be sure that you are making a profit when you have to according to your plan.
Have a high percentage of trading wins
Your trading strategy should generate more than 50% winners. There is no doubt that a trading system with a smaller winning percentage can also be profitable, but the psychological stress is enormous. Taking 7 losers out of 10 trades and not doubting the system requires a lot of discipline, and many traders can't stand the pressure. After the sixth loser, they begin to “fix” the system or stop trading completely.
Especially for beginners, it is a big help to gain confidence in your trading and system if you have high win percentage over 65%.
Look for systems that are tested on at least 200 trades
The more trades you use in your back test (without any curve adjustments), the higher the chances that your trading system will be successful in the future. Look at the following table:
Trade Amount 50 100 200 300 500 Margin of Error 14% 10% 7% 6% 4%
The more trades you have in your backtest, the smaller the margin of error, and the higher the chances of making future profits.
Choose a valid retest period
I recently saw the following advertisement: “Since 1994 I have taught thousands of traders around the world the Simple and Reliable E-Mini trading methodology”.
That's very interesting, because the S&P e-mini was introduced in September 1997, and the Nasdaq e-mini in June 1999, therefore, neither of these contracts existed before 1997. What kind of e-mini trade does this vendor teach from 1994 - 1997???
The same goes for your back-testing: If you develop an S&P e-mini trading strategy, then you should re-test it only for the last 2-4 years, because even though the contract has been around since 1997, practically no one is trading it.
Now you know how to separate scams from trading systems that work well. By applying this checklist, you will easily identify the trading systems that work and those that will never work