Revealed the Secrets of Day Trading Systems

Revealed the Secrets of Day Trading Systems

Hi. It's Adam Halpern here from the Indicator Warehouse. And in a moment, Erich Senft will join us from supportandresistance.com. So today, we're going to do something a little different. In fact, some of the things you'll hear today might even shock you a bit. Today, we're going to reveal some secrets about indicators and day trading systems, and how they are created. Now, my goal with this presentation is to help you either build your own system or evaluate a system currently on the market that you're thinking about possibly buying.

So you might be wondering, why are we doing this? Well, this presentation came to me from listening to our customers, traders just like you. Now, of course, not all traders are alike. But every trader does share a common desire to succeed. And therefore, you share common concerns. I know this for sure, when we start talking about trading indicators or collections of indicators to make a complete system, everybody's first question is always the same. And that is, does it work? Or maybe even more to the point, how much money can it make me? Hey, we're all human.

And as crazy as that question may be, it's what we all really want to know. Well, here's the dilemma I want to point out. Vendors who sell day trading software often publish results as so-called, quote, "proof" that it works. A little while back, we even published an article on our blog about this very issue. It was in response to the CFTC Warning about day trading system vendors who try and entice you with statistics on how much money you can make with their software. The CFTC Warning reminds consumers, and I quote, "to obtain these results, trading system promoters typically pretend they traded futures contract at market prices that occurred sometime in the past.

Then, they calculate the trading results of these purported trades would have achieved had they been placed, based on actual historical prices." In short, these sneaky vendors are not showing you a real account from a real person. They are simply talking about what could have happened had certain trades been taken, very much like if I said to you at a roulette table, hey, if you'd bet on black, you would have won. How useful is that? Now, I think you'll agree this information is definitely not in the category of real results. In fact, it's totally distracting and useless information. The CFTC knows this, and that's why they advise consumers to be aware not get suckered.

At Indicator Warehouse, we'd sooner close shop than talk about what could have happened in the past. Frankly, I would be just too embarrassed to do it, let alone the unethical issues it raises. Instead, we focus on carrying day trading software with tangible features that make your trading easier and safer, so as to give you every boost possible to be more profitable. A quick browse through our store and demo videos will clearly demonstrate how our indicators and trading tools do exactly that. OK. We still need to address the question of what features make a solid day trading system. And therefore, you might be wondering what system or indicators you should buy, especially when you consider your account size, your experience, the market you wish to trade, and the time frames you plan to work with.

Well, thankfully, Erich Senft is going to take it from here and crack the code, so you know exactly what to consider when building or buying a day trading system. As you'll see, cracking the code is a guide to buying indicators or systems from any vendor, not just Indicator Warehouse. So without further ado, here's Erich Senft, a 17-year trading veteran and certified Commodities Trading Adviser. Thanks, Adam. All right, everyone. So today, we're going to discuss some of the things that go into developing an effective trading system, give you some examples, and maybe even a few recommendations. So you want to build a system where you're looking at a system. Where do you begin? Well, you begin with the end in mind. Essentially, you need to decide what it is you want that system to do. Are you looking for a system to give you short-term trades? Are you looking for long-term trades? Are you going to day trade? Are you going to position trade? It seems rather simple and straightforward.

But you'd be surprised how many people will buy a scalping system when actually they're looking for trend-trading system, and vice versa. Let's start with a little bit of an overview of what a trading system is. A trading system is more than just a buy signal. A complete trading system actually has three components to it. There's an entry, an exit, and money management. Each of these are equally as important. However, most trading systems out there will only give you one piece of the puzzle, usually the entry signal. Sometimes, you'll find a system that gives you two pieces of the puzzle, usually an entry and an exit signal. But very rarely will you find a system that encompasses all three components of what you need for a successful strategy. The single most important feature is that it is simple and clear to use.

Your system has to be clear, unambiguous. You have to be able to look at the chart and make a decision. And it's really a little bit of a balancing act, because the system has to be simple enough to use. Or simple and clear enough to use, but complex enough to filter out market noise. Those are usually the opposite sides of the same trading But ultimately, your system is going to depend on you.

You're going to determine what kind of signal generators you're going to look at. Are they going to be short term or long term? What their settings are going to be, and how you're going to use them. What kind of stocks you're going to use. What kind of money management you're going to use. These are all important considerations that you need to make it right out of the begin. All right. So which markets are you going to trade? This is also an important decision that you need to make as you go.

Can you actually afford to trade the market? If you're looking at a market like bonds that have $tick value, you're not going to be able to trade a market like that with a $5,000 or $10,000 account. Is the market going to be volatile enough for you? If you're looking at a scalping system or you're looking to design a scalping system, you're going to need a certain amount of volatility in the market in order to generate enough signals. Conversely, is it too volatile? If you're looking at a trend trading system, you're probably going to be focusing on a market mix that caters more to trending. For instance, the currency markets or perhaps the index or the interest instruments, which all tend to trend a little bit better, versus trading something like crude oil, which with its volatility may be better suited for a scalping type market.

You're also going to be looking at time frames and chart styles. Now, when I started trading many years ago, our charts still showed up in the mail, in a book. Shortly thereafter, computers came on the scene and online trading was born a little bit after that. When I started, you had a choice of time-based charts. That was it.

Shortly after that, tick charts arrived, then volume-based charts. And now there are so many charts, so many different charting styles, ranged charts, a whole slew of Japanese chart styles. Everybody's looking for some sort of edge. It's important for you to settle on one and settle on your settings and stick with it. You can also do a combination of settings and a combination of charts if you choose. But it's important to settle on something and work with it. The reason is, every time you change your chart style or your chart settings, you're essentially starting over. Now, there will be some adjustments that need to be made, but you're going to want to try to minimize that. So here we have the three components of a complete day trading system. You need a signal generator, you need an exit strategy, and you need a money management system. Now we're going to take a look at each of these in a little bit more detail. Let's start with the entry. Now, the entry is the most exciting part. This is the part where traders spend a lot of their time and their money perfecting their entry.

This is the sexy part of trading. Once again, you need to get very clear signals from your trade. That's the most important part of your system. It's more important, in fact, than accuracy, believe it or not. Right or wrong, you need to be able to look at a chart and make a decision from it. So if you look at the charge on the left, and that's actually a chart from one of our former students, you'll see that it has so much information on there that you can't possibly make a clean decision from.

In fact, when I saw that chart, I asked the person, I said, OK, show me a buy signal. And they weren't able to do it. Even in hindsight, they weren't able to show me a clear buy signal. The chart on the right has very clear signals, very simple, easy to make a decision versus the charge on the left, which is all convoluted. Now, your signal also has to match your trading style. For instance, if you're scalping, you're going to need to generate more signals. You're going to need a system that's more sensitive. You're going to rely on shorter term price swings. And vice versa if you're looking at a trending tool, you're going to want the system to be a little less sensitive to take advantage of those bigger price moves and perhaps filter out some of that market noise that's happening at the time. Now sometimes, it's as simple as adjusting your settings to meet your style requirements.

For instance, if you have your charts set up with your indicators set up the way you want, and you're not generating enough signals, sometimes it's a simple matter of just shortening your timeframe somewhat. And likewise, if you're looking at a trending signal, the opposite is true. Sometimes it's just a matter of extending the time period a little bit. Essentially, there's two basic styles of systems. There's only two types. There's a price based system, or an indicator based system, or a combination of the two.

Most new traders are better served by an indicator based system. And there's pros and cons for each. But the big pro with an indicator based system is that it gives you a clear go, no-go signal. When you're in the heat of the moment, and you're generating signals, and you're trading, you need to be able to look at that and say, yes, this is a buy signal. Or this is a sell signal. You have very little time for subjective thought. That's the big pro of an indicator based system. Of course, the big con for indicator based systems is that because indicators are mathematically based, they rely on historical information going back x number of periods to actually generate what it is you're seeing in the indicator. And as such, all indicators tend to be lagging to some degree or another. Some are more sensitive. Some are less sensitive. Of course, that's where price shines is that price is super responsive, super quick. You develop signals faster if you know what to look for.

And of course. That's the big downside with trading a price based system is that it usually requires a lot more knowledge and experience, sometimes years worth of knowledge and experience. I heard of a very successful Italian investor who was famous for his investing skills. And when somebody asked him, how do I learn to trade, he said, sit in front of a chart for six hours a day for 10 years.

And you will learn how to trade. And obviously, he was a price based type trader. With enough experience, you will get good at recognizing what the market is going to do next. More often than not, however, it's a blend of the two, where you take some price into consideration and you take some indicator into consideration. And you develop your system out of that. But remember, whatever you do it has to be clear. Clear, clear, clear. I cannot stress that to you enough. All right. So that's your entry, the things that you should be looking at. Now, what about your exit, your exit strategies? Most systems never address this question. And yet, it's one of the most important questions that you need to deal with.

What are you going to do with it once you're in that trade? Now, you do have some options. Are you going to go all in, all out? Are you going to trail a stock? If you're going to trail a stock, how are you going to trail it? If you're going to go all in or all out, where are you going to take your profit? Again, you need to keep it simple. When you're trading, you don't have time to think. You only have time to react.

And I love this photo here of the base jumpers, because that's exactly what trading feels like, isn't it? You jump off, and you don't know. You don't know. Is it going to go higher or is it going to go lower? At least these guys know they're going down. But here, too, you only have time to react. You don't have time to think through something complex. All right. Now, let's go on to the most important part-- or what I consider to be one of the most important parts-- of the trading puzzle and the one that is most neglected, which is money management. This is really the key to your strategy and to your success. But money management is not what you think it is. This quote here from Paul Tudor Jones should be printed out and hung above your trading computer.

And you should look at it every day. It's that important. Paul Tudor Jones, one of the most successful traders of recent times, said, "Where you want to be is always in control, never wishing, always trading, and always first and foremost protecting your ass. That's why most people lose money as individual investors or traders, because they're not focusing on losing money. They need to focus on the money that they have at risk and how much capital is at risk in any single investment they have. If everyone spent 90% of their time on that, not 90% of the time on pie-in-the-sky ideas on how much money they're going to make. Then, they will be incredibly successful investors." Let's take a look at what he's saying here. What Paul Tudor Jones is saying is that money management is not about risk/reward ratios. Did you catch what he said there? Did you catch what he said about risk? Let's go back one more time, because it's that important. He says, you need to focus on the money that you have at risk and how much capital is at risk in any single investment.

You should spend 90% of your time on that. And yet, where do most traders spend their time? Thinking about the reward side of the equation. But when you focus on the reward part of the trade, that's the part of the trade that you have absolutely no control over. So it doesn't make sense to focus on the reward part of the trade and not on the risk part. Everybody tells you that you need a risk/reward or at least a risk/reward in order to take a trade. I'm sorry. That's all a bunch of baloney. In fact, I could do a whole webinar on the fallacy of risk/reward ratios and why they don't work. But in a nutshell, they don't work because nobody knows where the market is going to go next. Why would you not take a trade, because you cannot envision a suitable reward side to your trade? Look at the markets today. The markets went-- I guarantee you-- much higher than anybody anticipated that they would, or almost everybody anticipated that they would. A lot of people stayed out of trades today, because they thought the market was going to hold up at the recent highs.

Well, it didn't. It blew well past those highs. Risk/reward ratios are not the way to go. In fact, the only part of the trade that you should focus on is the risk part of the trade. And this is so important that we actually put together a tool. It's a free tool for you to use. It's at this link here. You can copy it down and go visit it later. And it will teach you the importance of managing your risk. In fact, remember early on how I told you with your entry that you don't need an accurate entry, that it's more important that you have a clear entry over an accurate entry? Well, using this tool, you're going to Revealed why, why you can have a 50% winning system. That's right. You can be wrong half of the time and still make money. In fact, the cutoff line seems to be about 45%. So you can have a system that's wrong more than half of the time and still make money, if you manage your money correctly.

And that's all about managing your risk, managing your capital, taking advantage of the market when it presents it to you, and limiting your losses when the trade does not work out in your favor. It's all about position sizing and correct money management. In short, you never want to over-capitalize a bad trade or under-capitalized a winning trade. And that's what good money management allows you to do. All right. So after that you have your entry, you have your exit strategy. You know about money management now, how to control your risk. What do you do now? Now, you test and you test and you test some more.

People are always asking, how long do I have to test it for. We've all those things, trade it for three months and then go trade real money. Well, it doesn't work that way. I would rather you put a number on it. I always tell people that you should test 100 trades. And the reason you trade 100 trades or test 100 trades is because then you have a very simple definition of your winning probabilities. If you have 60 winning trades out of 100, you probably have a 60% system. And if you have 30 winning trades out of 100, well, then you probably need to do something with your system. So very simple. Track your results. I cannot emphasize that enough either. It's important that you make a note, that you keep some sort of trading log. It does not have to be very elaborate, but you do need to track your results. Back-test 100 trades. Forward-test 100 trades.

This is going to do a couple of things for you. First and foremost, it's going to increase your confidence in your system. Remember, I've been mentioning how important clarity is to you. Well, testing will give you the confidence that when you get the signal, you're going to know what to do with it. And you're not going to have any doubt or hesitation to take it. This is also the time that you're going to want to tweak your system a little bit. If your system is performing pretty well, but it's a little light in some spots. Well, this might be the time to tweak a setting on an indicator, or your timeframe, or something. But we're talking tweaking, we're not talking changing. We're not taking momentum out of the equation and putting in, or Stochastics in, or something like that. If you go that far, then you've actually just developed a new system. And you need to start the process over again. But it's important that you don't cheat yourself during this phase. Testing is paramount. At Indicator Warehouse we test and test and test, until we know that the system is reliable, that the signals are clean, that they're easy, and obviously that they work.

Once you have that, then you're off and running. So there you have it. If you get those three components in place, you will have a successful trading system. And then, all that's left for you to do is go make your fortune. .



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