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How to Evaluate Day Trading Systems

By Edited Mar 14, 2014 0 0

The best way to start out with any day trading program is to first define your financial objectives and then put together a plan that spells out how you will reach your financial goals. Once you've completed the two tasks, you will want to begin the process of evaluating systems pertinent to your day trading activities. The following steps explain what aspects you'll need to consider in order to find a day trading system that will allow you to meet your financial objectives.

Things You Will Need

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Step 1

The day trading system must be easy to understand with not a great deal of complexity. The most successful traders use systems with less than ten rules. The truth of the matter is a system with layers of rules is not going to produce profits.

Step 2

You will want to employ a system where the rules are easy to understand and implement. Consider this: The markets can move quickly and prove highly volatile in nature-why then would you want to work with a highly complex formula in order to make a decision? The end justifies the means within this scenario: Use logic and simplified tools in order to arrive at decisions quickly.

Step 3

The best traders conduct day trading within electronic markets. There are two reasons you will want to find a system where you can conduct trading in this manner: 1) The commission structure is more reasonable; and, 2) Your order will immediately be filled. You will want to know as quickly as possible if your order was filled, and if so, at what price.

Step 4

Based on the preceding information, you will plan your subsequent exit order. Keep in mind; you never ever want to place your exit order before you are fully assured your initial order was filled. When you trade by way of non-electronic markets, you may wait for some time before receiving information that your entry order was filled. You cannot afford (literally) to wait! During the delay, the market may have already turned and you will have suffered a loss that was unnecessary.

Step 5

Do you now see why it is so critically important you use a day trading system that allows you to trade electronically? Not doing so could spell disaster. The electronic markets allow you to receive your order fill information within a split second. You can then easily make a quick decision with regard to your exit order. The idea here is trading markets providing this kind of liquidity assures that you save money and protects you against unnecessary losses.

Step 6

You need to be realistic with regard to the outcome of a trade. Let's face it: Losses, as much as wins, are part of the nature of day trading. Certainly you should strive to win or produce profits; however, it would be unreasonable to expect that any system could produce a positive result one-hundred percent of the time. A trading system where there is an extremely high-percentage of gains may have been under tested with respect to number of trades. The high percentage of gains may have been adjusted to the low amount of relative trades: In other words, the end percentage with respect to gains looks deceptively good. You are "doomed" from the start if you don't look into the details of why the percentage of gains is extraordinarily high on any particular system.

Step 7

In order to side step preconceived notions that are unrealistic, look for a trading system that shows statistically gains that occur approximately seventy percent of the time or within a range of sixty to eighty percent, and with a profit factor of two and five tenths at best or one and three tenths at worst. If you use these numbers, you may be assured you won't be purchasing a system that has not been extensively tested with regard to gains.

Step 8

The risk and the wins must be in balance. Certainly, the more investment you have to supply to a trade the greater the possible reward-however, that said, there is also more chance of failure as well. First determine what percentage you can accept as far as loss and what percentage you'd like to see as gain. In so doing, you will be able to match your expectations up with the system's levels of past performance. Your risk of loss in regard to your system's levels of past performance should be at a ratio of less than five percent. Your comparative gain should be five to ten times greater than your risk. This means if your loss within your account is three percent, your gain should be at maximum thirty percent. Your system should fall within these defined loss and win parameters to be effective.

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