Making Sure Your Day Trading Plan Works
Windowoworld.com – How to create a basic day trading plan. Now that you have set your goals and created your day trading plan you need to make sure they really work. Everything might look good so far, but how can you be sure that the day trading system works when you start trading it for real money?
Evaluating a trading system is easier than you think. Below you will find the 10 Principles of a Successful Day Trading System that we have developed and refined over the last few years. You must use this Power Principle to evaluate your trading system, whether you are developing it yourself or are thinking of buying it. By examining the system against these principles, you can dramatically increase your chances of success.
Principle # 1: Few rules – easy to understand
It may surprise you that the best daytrading systems have less than 10 rules. The more rules you have, the more likely you are to “curve” your trading system to the past, and an overly optimized system is unlikely to make a profit in the real market.
It is important that your rules are easy to understand and follow. Markets can be very wild and fast-paced, and you won’t have time to calculate complex formulas for making trading decisions. Think about successful floor traders: The only tools they use are calculators, and they make thousands of dollars every day.
Principle # 2: Trade electronic and liquid markets
I highly recommend that you trade in the electronic market because the commissions are lower and you receive instant replenishment. You need to know as quickly as possible whether your order has been filled and at what price, because based on this information you are planning to exit.
You must not make an exit order until you know that your entry order has been filled. When you trade in an open protest market (non-electronic) you may have to wait a while before you receive your content. By then, the market may have turned and your profitable trade has turned into a loss!
When trading the electronic market, you receive a fill in less than a second and can immediately place your outgoing order. Trading your liquid markets can avoid slippage, which will save you hundreds or even thousands of dollars.
Principle # 3: Realistic expectations
Losses are part of our business. A no-loss trading system is “too good to be true.” I recently came across a trading system with a huge winning percentage of 91% and a withdrawal of less than $ 500. WOW!
When looking at the details, it turns out that the daytrading system was only tested on 87 trades and – of course – features curves. If you run a trading system with numbers that are too good to be true, then it might be THAT exactly: Too good to be true.
Typically you can expect the following from a strong trading system:
- Winning percentage 60-80%
- Profit factor 1.3 – 2.5
- Maximum withdrawal of 10-20% of annual profit.
Use these numbers as a rough guideline, and you will easily identify a system with curves.
Principle # 4: Maintain a healthy balance of risk and reward
Let me give you an example: If you go to a casino and stake everything you have on “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 “breakdown” as losing 20% of your account, and you define “success” as making 20% of your profit. Having a trading system with past performance results allows you to calculate “risk of failure” and “chance of success”.
Your risk of ruin should always be less than 5%, and your chance 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.
Principle # 5: Find a system that makes at least five trades per week
The higher the trading frequency, the less likely it is to have a month loss. If you have a trading system that has a 70% winning percentage, but only makes 1 trade per month, then 1 loser is enough for one month of losing money. In this example, you could have lost several months in a row before you finally started making profits. 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% winning percentage – your chances of a winning month are very high.
And that’s the goal of all traders: Have as many winning months as possible!
Principle # 6: Start small – grow big
Your daytrading 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 differs from many “martingale” trading systems which require an increase in position size when you have 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 that was previously lost. It’s not uncommon to have 4-5 consecutive losing trades, and it would have required trading 16 contracts after only 4 losses! To trade the S&P e-mini, you need an account size of at least $ 63,200, just to meet margin requirements. That’s why the Martingale system doesn’t work.
Principle # 7: Automate your trading
Emotions and human errors are the most common mistakes traders make. By all means, you must avoid this mistake. Especially during fast markets, it is very important that you determine entry and exit points quickly and accurately; otherwise you may miss the trade or find yourself in a losing position.
Therefore, you should automate your trading and look for a trading system that is or can be automated. Automating your trades keeps him free of human emotions. The buy and sell operations are all automatic, hands-free, without manual intervention and you can be sure that you are making a profit at the time that suits your plan.
Principle # 8: Have a high percentage of winning trades
Your daytrading strategy should yield more than 50% winners. There is no doubt that daytrading systems with a smaller winning percentage can also be profitable, but the psychological pressure is immense. Taking 7 losers out of 10 trades and no doubt the system requires great discipline, and many traders just can’t stand the pressure. After the sixth loser they start to “fix” the system or stop trading completely.
Especially for beginners, it is helpful to gain confidence in your trading and system if you have a high winning percentage of more than 65%.
Principle # 9: Look for a trading system that is tested on at least 200 trades
The more trades you use in your test back (without curve adjustments), the higher the chances are that your day trading system will be successful in the future. See the following table:
Amount of Trade 50 100 200 300 500 Margin of Error 14% 10% 7% 6% 4%
The more trades you make on your back test, the smaller the margin of error, and the higher the chances of making a profit in the future.
Principle # 10: Choose a valid retest period
I recently saw the following ad: “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, none of these contracts existed before 1997.What kind of e-mini trading did this vendor teach from 1994-1997 ???
The same goes for testing your back: If you develop an S&P e-mini trading strategy, then you should only test it for the last 3-4 years, because even though contracts have been around since 1997 practically nobody trades them (see chart below) :
As you can see, it is quite easy to find a trading system that works. By implementing this checklist, you will easily identify trading systems that work and that will never work.