| In our article "Define your Goals and
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| | risk of ruin is 4%, then your chance of
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| Make a Plan" you learned:
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| | success should be 40% or higher.
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| - How to define your financial and
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| | Principle #5: Find a system that produces
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| trading goals.
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| | at least five trades per week
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| - How to select the right market for
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| | The higher the trading frequency, the
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| your trading goals.
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| | smaller is the chances of having a losing
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| - What timeframe you should trade
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| | month. If you have a trading system that
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| in.
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| | has a winning percentage of 70%, but only
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| - The difference between trading
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| | produces 1 trade per month, then 1 loser
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| styles and how to find the right one for
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| | is enough to have a losing month. In this
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| you.
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| | example, you could have several losing
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| - How to create a basic daytrading
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| | months in a row before you finally start
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| plan.
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| | making profits. In the meantime, how do
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| Now that you defined your goals and
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| | you pay for your bills?
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| created your daytrading plan, you need to
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| | If your trading system produces five
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| make sure it really works. Thus far
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| | trades per week, then you have on average
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| everything might look great, but how can
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| | 20 trades per month. Having a winning
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| you be sure that the day trading system
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| | percentage of 70% - your chances of a
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| works when you start trading it with real
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| | winning month are extremely high.
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| money?
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| | And that's the goal of all traders:
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| Evaluating a trading system is easier
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| | Having as many winning months as
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| than you think. Below you'll find 10
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| | possible!
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| Principles of Successful Day Trading
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| | Principle #6: Start small - grow big
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| Systems that we developed and refined
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| | Your daytrading system should allow you
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| over the last couple of years. You should
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| | to start small and grow big. A good
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| use these Power Principles to evaluate
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| | trading system allows you to start with
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| your trading system, whether you
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| | one or two contracts, and then increases
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| developed it on your own or think about
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| | your position as your trading account
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| purchasing one. By checking a system
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| | grows. This is in contrast to many
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| against these principles you can
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| | "martingale" trading systems that require
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| dramatically increase the chances of
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| | increasing position sizes when you are in
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| being successful.
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| | a losing streak.
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| Here we go:
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| | You probably heard about this strategy:
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| Principle #1: Few rules - easy to
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| | Double your contracts every time you
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| understand
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| | lose, and one winner will win back all
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| It may surprise you that the best
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| | the money you previously lost. It's not
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| daytrading systems have less than 10
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| | unusual to have 4-5 losing trades in a
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| rules. The more rules you have, the more
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| | row, and this would already require to
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| likely you "curve-fitted" your trading
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| | trade 16 contracts after just 4 losses!
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| system to the past, and such an
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| | Trading the e-mini S&P you would then
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| over-optimized system is very unlikely to
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| | need an account size of at least $63,200,
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| produce profits in real markets.
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| | just to meet the margin requirement.
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| It's important that your rules are easy
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| | That's why martingale systems don't work.
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| to understand and execute. The markets
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| | Principle #7: Automate your trading
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| can behave very wild and move fast, and
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| | Emotions and human errors are the most
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| you won't have the time to calculate
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| | common mistakes that traders make. By all
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| complicated formulas in order to make a
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| | means you have to avoid these mistakes.
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| trading decision. Think about successful
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| | Especially during fast markets, it is
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| floor traders: The only tool they use is
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| | crucial that you determine the entry and
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| a calculator, and they make thousands of
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| | exit points fast and accurately;
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| dollars every day.
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| | otherwise, you might miss a trade or find
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| Principle #2: Trade electronic and liquid
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| | yourself in a losing position.
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| markets
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| | Therefore you should automate your
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| I strongly recommend that you trade
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| | trading and look for a trading system
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| electronic markets because commissions
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| | that either already is or can be
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| are lower and you receive instant fills.
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| | automated. Automating your trading makes
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| You need to know as fast as possible if
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| | it free of human emotion. The buy and
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| your order was filled and at what price,
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| | sell operations are all automatic,
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| because based on this information you
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| | hands-free, with no manual interventions
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| plan your exit.
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| | and you can be sure that you make profits
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| You should never place an exit order
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| | when you should according to your plan.
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| before you know that your entry order is
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| | Principle #8: Have a high percentage of
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| filled. When you trade open outcry
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| | winning trades
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| markets (non-electronic) you might have
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| | Your daytrading strategy should produce
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| to wait a while before you receive your
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| | more than 50% winners. There's no doubt
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| fill. By that time, the market might have
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| | that daytrading systems with smaller
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| already turned and your profitable trade
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| | winning percentages can be profitable,
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| has turned into a loss!
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| | too, but the psychological pressure is
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| When trading electronic markets you
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| | enormous. Taking 7 losers out of 10
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| receive your fills in less than one
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| | trades and not doubting the system takes
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| second and can immediately place your
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| | great discipline, and many traders can't
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| exit orders. Trading liquid markets you
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| | stand the pressure. After the sixth loser
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| can avoid slippage, which will save you
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| | they start "improving" the system or stop
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| hundreds or even thousands of dollars.
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| | trading it completely.
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| Principle #3: Realistic expectations
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| | Especially for beginners it is a big help
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| Losses are part of our business. A
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| | to gain confidence in your trading and
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| trading system that doesn't have losses
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| | your system if you have a high winning
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| is "too good to be true". Recently I ran
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| | percentage of more than 65%.
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| into a trading system with a whopping
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| | Principle #9: Look for a trading system
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| winning percentage of 91% and a drawdown
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| | that is tested on at least 200 trades
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| of less than $500. WOW!
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| | The more trades you use in your back
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| When looking at the details it turned out
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| | testing (without curve-fitting), the
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| that the daytrading system was only
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| | higher the probabilities that your day
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| tested on 87 trades and - of course -
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| | trading system will succeed in the
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| curve fitted. If you run across trading
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| | future. Look at the following table:
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| systems with numbers too good to be true,
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| | Number of Trades 50 100 200 300 500
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| then it's probably exactly THAT: Too good
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| | Margin of Error 14% 10% 7% 6% 4%
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| to be true.
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| | The more trades you have in your back
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| Usually you can expect the following from
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| | testing, the smaller the margin of error,
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| a robust trading system:
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| | and the higher the probability of
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| - A winning percentage of 60-80%
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| | producing profits in the future.
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| - A profit factor of 1.3 - 2.5
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| | Principle #10: Chose a valid back testing
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| - A maximum drawdown of 10-20% of
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| | period
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| the yearly profit.
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| | I recently saw the following ad: "Since
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| Use these numbers as a rough guideline,
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| | 1994 I've taught thousands of traders
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| and you will easily identify curve fitted
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| | worldwide a Simple and Reliable E-Mini
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| systems.
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| | trading methodology".
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| Principle #4: Maintain a healthy balance
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| | That's very interesting, because the
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| between risk and reward
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| | e-mini S&P was introduced in
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| Let me give you an example: If you go to
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| | September 1997, and the e-mini NASDAQ in
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| a casino and bet everything you have on
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| | June 1999, therefore, none of these
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| "red", then you have a 49% chance of
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| | contracts existed before 1997. What kind
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| doubling your money and a 51% chance of
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| | of e-mini trading did this vendor teach
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| losing everything. The same applies to
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| | from 1994-1997???
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| trading: You can make a lot of money if
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| | The same applies to your back testing: If
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| you are risking a lot, but then risk of
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| | you developed an e-mini S&P trading
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| ruin is very high. You need to find a
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| | strategy, then you should back test it
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| healthy balance between risk and reward.
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| | only for the past 3-4 years, because even
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| Let's say you define "ruin" as losing 20%
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| | though the contract has existed since
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| of your account, and you define "success"
| |
| | 1997, there was practically nobody
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| as making 20% profits. Having a trading
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| | trading it (see chart below):
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| system with past performance results let
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| |
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| you calculate the "risk of ruin" and
| |
| | As you can see, it's rather easy to find
|
| "chance of success".
| |
| | a trading system that works. By applying
|
| Your risk of ruin should be always less
| |
| | this checklist you will easily identify
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| than 5%, and your chance of success
| |
| | trading systems that work and those that
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| should be 5-10 times higher, e.g. if your
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| | will never make it.
|
