How to Find a Day Trading System that Works

Day Trading with a system will dramatically improve your chances of making money in the markets.

The next challenge is to find a day-trading system that works. Today you have the chance to choose from more than 300 daytrading systems available. Unfortunately just 10% of them are trading profitably.

In the next three minutes I will present you the 10 Power Principles for Successful Day Trading Systems, which will help and support you in your research.

Principle #1: Few rules - easy to understand

It may surprise you that the best trading systems have less than 10 rules. The more rules you have, the more likely you "curve-fitted" your trading system to the past, and such an over-optimized system is very unlikely to produce profits in real markets.

It's important that your rules are easy to understand and execute. The markets can behave very wild and move fast, and you won't have the time to calculate complicated formulas in order to make a trading decision. Think about successful floor traders: The only tool they use is a calculator, and they make thousands of dollars every day.

Principle #2: Trade electronic and liquid markets

We strongly recommend that you trade electronic markets because the commissions are lower and you receive instant fills. You need to know as fast as possible if your order was filled and at what price, because based on this information you plan your exit.

You should never place an exit order before you know that your entry order is filled. When you trade open outcry markets (non-electronic) you might have to wait awhile before you receive your fill. By that time, the market might have already turned and your profitable trade has turned into a loss!

When trading electronic markets you receive your fills in less than one second and can immediately place your exit orders. Trading liquid markets you can avoid slippage, which will save you hundreds or even thousands of dollars.

Principle #3: Make consistent profits

You should always look for a daytrading system that produces a nice and smooth equity curve, even if in the long run the net profit is slightly smaller. Most professional traders prefer to take small profits every day instead of big profits every now and then. If you trade for a living, you need to pay your bills from your trading profits, and therefore you should regularly deposit profits into your trading account.

Making consistent profits is the secret of successful traders!

Principle #4: 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 "red", then you have a 49% chance of doubling your money and a 51% chance of losing everything. The same applies to day trading: You can make a lot of money if you are risking a lot, but then risk of ruin is very high. You need to find a healthy balance between risk and reward.

Let's say you define "ruin" as losing 20% of your account, and you define "success" as making 20% profits. Having a trading system with past performance results let you calculate the "risk of ruin" and "chance of success".

Your risk of ruin should be always less than 5%, and your chance of success should be 5-10 times higher, e.g. if your risk of ruin is 4%, then your chance of success should be 40% or higher.

Principle #5: Find a system that produces at least five trades per week

The higher the trading frequency the smaller the chances of having a losing month. If you have a day trading system that has a winning percentage of 70%, but only produces 1 trade per month, then 1 loser is enough to have a losing month. In this example, you could have several losing months in a row before you finally start making profits. In the meantime, how do you pay for your bills?

If your day trading system produces five trades per week, then you have on average 20 trades per month. Having a winning percentage of 70% - your chances of a winning month are extremely high.
That's the goal of all traders: Having as many winning months as possible!

Principle #6: Start small - grow big

Your day trading system should allow you to start small and grow big. A good day trading system allows you to start with one or two contracts, and then increases your position as your trading account grows. This is in contrast to many "martingale" trading systems that require increasing position sizes when you are in a losing streak.

You probably heard about this strategy: Double your contracts every time you lose, and one winner will win back all the money you previously lost. It's not unusual to have 4-5 losing trades in a row, and this would already require to trade 16 contracts after just 4 losses! Trading the e-mini S&P you would then need an account size of at least $63,200, just to meet the margin requirement. That's why martingale systems don't work.

Principle #7: Automate your day trading

Emotions and human errors are the most common mistakes that traders make. By all means you have to avoid these mistakes. Especially during fast markets, it is crucial that you determine the entry and exit points fast and accurately; otherwise, you might miss a trade or find yourself in a losing position.

Therefore you should automate your trading and look for a day trading system that either already is or can be automated. Automating your trading makes it free of human emotion. The buy and sell operations are all automatic, hands-free, with no manual interventions and you can be sure that you make profits when you should according to your plan.

Principle #8: Have a high percentage of winning trades

Your day trading strategy should produce more than 50% winners. There's no doubt that trading systems with smaller winning percentages can be profitable, too, but the psychological pressure is enormous. Taking 7 losers out of 10 trades and not doubting the system takes great discipline, and many traders can't stand the pressure. After the sixth loser they start "improving" the system or stop trading it completely.

Especially for beginners it is a big help to gain confidence in your trading and your system if you have a high winning percentage of more than 65%.

Principle #9: Look for a system that is tested on at least 200 trades

The more trades you use in your backtesting (without curve-fitting), the higher the probabilities that your day trading system will succeed in the future. Look at the following table:

The more trades you have in your backtesting, the smaller the margin of error, and the higher the probability of producing profits in the future.

Principle #10: Chose a valid backtesting period

I recently saw the following ad: "Since 1994 I've taught thousands of traders worldwide a Simple and Reliable E-Mini trading methodology".

That's very interesting, because the e-mini S&P was introduced in September 1997, and the e-mini Nasdaq 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 applies to your backtesting: If you developed an e-mini S&P trading strategy, then you should backtest it only for the past 2-4 years, because even though the contract has existed since 1997, there was practically nobody trading it (see chart below):

Now you know how to separate the scam from good working day trading systems. By applying this checklist you will easily identify day trading systems that work and those that will never make it.

More free information how to succeed with trading systems

10 Steps To Professional Day Trading
Everyone trades a little differently. The trading method outlined below is MY personal approach to trading. This method has worked for me for the last 20 years, and has helped me to avoid big draw downs since the mid 1980's. My trading strategy...

5 Day Trading Tips for Success
If someone tells you that you can get rich quick day trading...run for the hills! There are no overnight successes, unless you are very lucky! Day Trading isn't easy, but with experience, dedication, self- control and hard work, you *can*...

Day Trading Futures
When day trading futures, you enter and exit all positions in the same day - never carrying a position overnight. Since the overnight moves of the market are difficult to predict, many traders avoid risk by day trading. Ironically, the public...

Day Trading - Moving Averages vs Support and Resistance
When day trading the SP and Nasdaq futures, do you rely on your moving averages more than your support & resistant areas? During the first hour of trading, the support and resistance zones on the SP and Nasdaq futures are the most important...

System Trading vs. Discretionary Trading: Which Is Better? Part 1
Trading Places Dan Akroyd and Eddie Murphy , as they prepare to enter the trading pits: Louis Winthorpe III: Think big, think positive, never show any sign of weakness. Buy low, sell high. Fear? That's the other guy's problem....

System Trading vs. Discretionary Trading: Which Is Better? Part 2
In part one, we discussed the pros and cons of using a systematic approach to trading. In part two, let's look at the same for discretionary trading . What Is Discretionary Trading? Discretionary trading is when a trade is taken where...

The Power of Small Numbers: Trading Success is Based on Consistency, Not Home Runs
Online trading is so seductive - just sit, click, and rake in the profits! But as anyone who has ever seriously attempted online trading will probably tell you, it's just not as easy as it sounds. Many beginning traders are seduced by the lure...

Trading Tip 01: Six Reasons Why You Need a Trading System
Every minute more than 150 Million Dollars change hands in the electronic index futures markets like the e-mini S&P and e-mini NQ. You can win or lose thousands of dollars in a few minutes; the futures markets can make you rich in a few...

Trading Tip 03: Define Your Goals and Make a Plan
Defining your goals and making a plan is probably the most important task a trader can undertake. Many traders refer to their trading plan as a trading system . That's absolutely ok, since a trading system is nothing else than a structured...

Trading Tip 04: Making sure your trading plan works
In our article "Define your Goals and Make a Plan" you learned: How to define your financial and trading goals . How to select the right market for your trading goals. What timeframe you should trade in. The...

Trading Tip 05: How start risk-free without risking a single penny
You can have the best trading plan but you'll never make any money if you don't take action and actually start trading. But how can you start without risking a single penny of your own money? After all, you are still new to trading and don't...

Trading Tip 06: How to Develop a Profitable Trading System
In this article I will explain to you how to develop a profitable trading system in five steps: Step 1: Select a market and a timeframe Step 2: Define entry rules Step 3: Define exit rules Step 4: Evaluate your system Step 5:...

Trading Tip 07: How to optimize a trading system without curve-fitting it
There’s a fine line between “optimizing” and “curve-fitting”. You have to make sure that your don’t over-optimize. In the following example I’ll show you how to determined the “best”...

Trading Tip 08: How long should I backtest a trading system?
I am frequently asked how long one should backtest a trading system. Though there's no easy answer, I will provide you with some guidelines. There are a few factors that you need to consider when determining the period for backtesting your...

Trading Tip 09: How do I backtest the right way?
In my opnion backtesting can be a very powerful tool if used correctly. The problem is that many trader over-use the functions provided by the different backtesting software packages and think more is better. Many so-called system developers...

Trading Tip 10: What account size do I need? How much money can I make?
These questions are the most frequently asked questions. In this article we will try to answer these questions. First of all, let's clarify a common misunderstanding: You never risk your full account size. You always have a "catastrophic stop",...

Trading Tip 11: What you can expect when trading a system
If you think about trading a system then this lesson is of highest importance to you. Especially if you are new to trading systems you need to know what to expect when trading a system. System trading can be very rewarding but you need to know...

Trading Tip 12: Maintain Your Perspective
System trading can be very rewarding but you need to know how to avoid the pitfalls of system trading if you want to be successful in the long run. You need to know what to expect when trading a system. Many traders think that when trading a...

Trading Tip 13: When Should You Override a Trading Strategy?
Let's use the following example for trading the e-mini S&P: Your system establishes a long position at 1190.00 and the profit target order was placed at 1192.25 ($112.50 profit per contract). Prices moved up to 1192.00 and reversed. One hour...

Trading Tip 14: Understanding Winning Percentage
Let's say you purchased or developed a system that has a winning percentage of 70%. What exactly does that mean? It means that the probability of having a winning trade is 70%, i.e. it is more likely that the trade you are currently in turns...

Trading Tip 15: What's the deal with hypothetical results?
Question: I recently read about your e-mini S&P Trading System . The fact that your system is based on hypothetical results has made me a bit skeptical. Does it mean that the system won't work in real time? Answer: Published...

Trading Tip 16: Paper Trading Resuts vs. Real Trading Results
Whether you purchased a trading strategy or developed your own system or trading ideas: You should *always* paper trade the new system first. There are several reasons why paper trading can save you thousands of dollars. Trading your strategy on...

Trading Tip 17: Five Tips For Choosing an Automated Trading Software
Emotions and human errors are the most common mistakes that traders make. By all means you have to avoid these mistakes. Especially during fast markets, it is crucial that you determine the entry and exit points fast and accurately;...

Trading Tip 18: Should I Incorporate Fundamental Analysis When Trading a System?
There's a common misconception about "Fundamental Analysis": People tend to think that the market should react in a certain way to news. Example: "Unemployment Rate goes down", which means that the economy is doing better,...

Trading Tip 19: Fundamental vs. Technical Analysis - Which one is better
There are two general schools of analysis: Fundamental and technical. Which one is better? Which one should YOU use? Let’s take a look at the definition of fundamental analysis : "Fundamental stock analysis requires, among...

Trading Tip 20: Top Five Reasons Why You Should Consider Index Futures Trading
You can trade stocks, forex and futures. Depending on your account size "stocks" might not be an option for you, since you need at least $25,000 in your account to daytrade stocks. Forex trading is very popular, but if you are new to...

Back to resource center