In this narrative I will clarify to you how to organize a profitable day trading ideas in five steps:
Step 1: adopt a market and a timeframe
Step 2: Define entry rules
Step 3: Define exit rules
Step 4: rate your day trading system
Step 5: enhancing the day trading system
Let's take a closer look at these steps.
Step 1: adopt a market and a timeframe
Every market and every timeframe can be traded with a day trading system. But if you want to look at 50 separate futures markets and 6 major timeframes (e.g. 5min, 10min, 15min, 30min, 60min and daily), then you need to rate 300 potential options. Here are some hints on how to limit your choices:
o Though you can trade every futures markets, we suggest that you stick to the electronic markets (e.g. E-mini S&P and other indices, Treasury Bonds and Notes, Currencies, etc). Ordinarily these markets are very liquid, and you won't have a question entering and exiting a trade. an additional one advantage of electronic markets is lower commissions: Expect to pay at least half the commissions you pay on non-electronic markets. Sometimes the disagreement can be as high as 75%.
o When you adopt a smaller timeframes (less than 60min) your median behalf per trade is Ordinarily comparably low. On the other hand you get more trading opportunities. When trading on a larger timeframe your profits per trade will be bigger, but you will have less trading opportunities. It's up to you to determine which timeframe suits you best.
o Smaller timeframes mean smaller profits, but Ordinarily smaller risk, too. When you are beginning with a small trading account, then you might want to adopt a small timeframe to make sure that you are not overtrading your account.
Most profitable day trading systems use larger timeframes like daily and weekly. These systems work, too, but, be prepared for less trading activity and bigger drawdowns.
Step 2: Define entry rules
Let's simplify the myths of "entry rules":
Basically there are 2 separate kinds of entry setups:
o Trend-following
When prices are sharp up, you buy, and when prices are going down, you sell.
o Trend-fading
When prices are trading at an extreme (e.g. Upper band of a channel), you sell, and you try to catch the small move while prices are sharp back into "normalcy". The same applies for selling.
In my conception swing trading is assuredly one of the best trading strategies for the beginning trader to get his or her feet wet. By contrast, trend trading offers greater behalf potential if a trader is able to catch a major market trend of weeks or months, but few are the traders with adequate discipline to hold a position for that period of time without getting distracted.
Most indicators that you will find in your charting software belong to one of these two categories: You have whether indicators for identifying trends (e.g. sharp Averages) or indicators that define overbought or oversold situations and therefore offer you a trade setup for a short term swing trade.
So don't come to be confused by all the possibilities of entering a trade. Just make sure that you understand why you are using a inescapable indicator or what the indicator is measuring. An example of a simple swing daytrading strategy can be found in the next chapter.
Step 3: Define exit rules
Let's keep it simple here, too: There are two separate exit rules you want to apply:
o Stop Loss Rules to protect your capital and
o Profit Taking Exits to realize your profits
Both exit rules can be expressed in four ways:
o A fixed dollar whole (e.g. ,000)
o A ration of the current price (e.g. 1% of the entry price)
o A ration of the volatility (e.g. 50% of the median daily movement) or
o A time stop (e.g. Exit after 3 days)
We don't suggest using a fixed dollar amount, because markets are too different. For example, natural gas changes an median of a few thousand dollars per day per contract; however, Eurodollars change an median of a few hundred dollars a day per contract. You need to equilibrium and normalize this disagreement when developing a day trading ideas and testing it on separate markets. That's why you should always use percentages for stops and behalf targets (e.g. 1% stop) or a volatility stop instead of a fixed dollar amount.
A time stop gets you out of a trade if it is not sharp in any direction, therefore freeing your capital for other trades.
Step 4: rate your day trading system
The first outline to look for is the net profit. Obviously you want your ideas to generate profits. But don't be frustrated when during the amelioration stage your day trading ideas shows a loss; try to reverse your entry signals. On our website http://www.rockwelltrading.com you already learned that trading is a zero sum game: So if you are going long at a inescapable price level, and you lose, then try to go short instead. Many times this is the easiest way to turn a losing ideas into a winning one.
The next outline you want to look at is the median behalf per trade. Make sure this whole is greater than slippage and commissions, and that it makes your day trading worthwhile. Day trading is all about risk and reward, and you want to make sure you get a decent bonus for your risk.
Take a look at the behalf Factor (Gross behalf / Gross Loss). This will tell you how many dollars you are likely to win for every dollar you lose. The higher the behalf factor the better the day trading system. A ideas should have a behalf factor of 1.5 or more, but watch out when you see behalf factors above 3.0, because it might be that you over-optimized the system.
Here are some more characteristics you might want to think besides the net behalf of a system:
o Winning percentage
Many profitable day trading systems accomplish a nice net behalf with a rather small winning percentage, sometimes even below 30%. These systems ensue the principle "Cut your losses short and let your profits run". However, You need to determine whether you can stand 7 losers and only 3 winners in 10 trades. If you want to be "right" most of the time, then you should pick a ideas with a high winning percentage.
o Number of Trades per Month
Do you need daily action? If you want to see something happening every day, then you should pick a day trading ideas with a high whole of trades per month. Many profitable day trading systems generate only 2-3 trades per month, but if you are not sick person adequate to wait for it, then you should adopt a day trading ideas with a higher trading frequency.
o Average Time in Trade
Some people get assuredly nervous when they are in a trade. I have heard of people who can't even sleep at night when they have an open position. If that's you, then you should make sure that the median time in a trade is as short as possible. You might want to choose a ideas that does not hold any positions overnight.
o Maximum Drawdown
A celebrated trader once said: "If you want your ideas to duplicate or triple your account, you should expect a drawdown of up to 30% on your way to trading riches." Not every trader can stand a 30% drawdown. Look at the maximum drawdown the ideas produced so far, and duplicate it. If you can stand this drawdown, then you found the right day trading system. Why doubling? Remember: your worst drawdown is always ahead of you.
o Most consecutive losses
The whole of most consecutive losses has a huge impact on your trading, especially when you are using inescapable types of money supervision techniques. Five or six consecutive losses can cause you a lot of problem when using an aggressive money management.
In addition this whole will help you to determine whether you have adequate discipline to trade the system: Will you still trade the ideas after you have experienced 10 losses in a row? It's not unusual for a profitable trading ideas to have 10-12 losses in a row.
Step 5: enhancing your system
There is a disagreement in the middle of "improving" and "curve-fitting" a system. You can improve your day trading ideas by testing separate exit methods: If you are using a fixed stop, try a trailing stop instead. Add a time stop and rate the results again. Don't look at the net behalf only; look also at the behalf factor, median behalf per trade and maximum drawdown. Many times you will see that the net behalf slightly decreases when you add separate stops, but the other figures might improve dramatically.
Don't fall into the trap of over-optimizing: You can eliminate approximately all losers by adding adequate rules. simple example: If you see that on Tuesdays you had more losers than on the other weekdays, you might be tempted to add a "filter" that prevents your day trading ideas from entering trades on Tuesdays. Next you find that in January you had much worse results than in other months, so you add a filter that enters trades only from February - December. You add more and more filters to avoid losses, and eventually you end up with a trading rule that I saw recently:
If Fve > -1 And Regression Slope (Close , 35) / Close.35 * 100 > -.35 And Regression Slope (Close , 35) / Close.35 * 100 -.4 And Regression Slope (Close , 70) / Close.70 * 100 -.2 And Macd Diff (Close , 12 , 26 , 9) > -.003 And Not Tuesday And Not DayOfMonth = 12 and not Month = August and Time > 9:30 ...
Though you eliminated all possibilities of losing (in the past) and this trading ideas is now producing astounding profits, it's very unlikely that it will continue to do so when it hits reality.
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