DAY TRADING SYSTEM DEVELOPMENT

How does a futures day trader know when to buy and sell? To put it simply, by following a day trading system. A day trading system outlines a structure for trading that includes the rules or criteria for getting into a trade, either long or short, and closing a trade, either at a profit or loss. A day trading system can be developed from scratch or learned through courses or books. For example, Building your E-mini Futures Trading Strategy is a free video that provides insights into constructing your own day trading system.

The principal requisite of a day trading system is that it be profitable overall. This does not mean that every trade need be a winner. Rather, the relative size and frequency of losses and gains must be such that, over time, a net profit results. For example, assume that only half of the trades of an E-mini® S&P 500® day trading system are profitable. If the average profit exceeds the average loss, then overall trading will be profitable.

A day trading system can be discretionary or model-based. Discretionary day trading systems rely solely on the "gut feeling" of the trader. For a variety of reasons, most traders have moved away from relying on discretion or at least, confine their discretion to only a small part of the overall system.

Model-based day trading systems quantify the conditions or criteria for a trade signal to be generated with the intent of eliminating the discretionary element from the trading decision. In many cases, the day trading system builds upon the study of technical analysis with the goal of identifying a proprietary trade indicator that gives an edge over other traders. Many such day trading systems are programmed via computer to run continuously and automatically notify the trader whenever a buy or sell signal is generated. In some cases, it may even be possible to interface the day trading system directly with the online trading platform so that trades are executed without even requiring the trader's intervention.

Whatever type of day trading system is used and regardless of its origin, it should be first tested under simulated but real-life conditions prior to risking actual dollars. This will also enable the day trader to develop some skill in implementing the day trading system. While the profitability and consistency of a discretionary system depends entirely on the trader, a model-based day trading system can be back-tested on historical data to provide an indication of performance. It can then be amended, if necessary, in an attempt to improve overall profitability.

There are no guarantees of profitability in the world of futures day trading, but the development of a reliable day trading system coupled with the personal discipline to follow that system go a long way toward making a day trader successful.