5 Ways to Improve a Daytrading System

When traders dream, we dream of daytrading.

We dream of the excitement of selling at the perfect time or making a killing in Hong Kong gold.

We don't dream of sitting around doing nothing for nine weeks, waiting for the EURUSD to break out of its base.

While the get-rich-quick allure lives in daytrading, consistent, reliable trading lives somewhere else.

What's the most reliable investment vehicle (allegedly)? Index funds. No trading; no life-changing big trades. Just a long track record of performance.

Why is the answer not daytrading? Daytrading is too changeable.

If we wait six months for a trade, then that move is probably reliable. If we're betting on something that might happen in the next fifteen minutes, who really knows?

Similarly, we can bet smartly that a baseball player is going to hit .300 at the end of the six-month season. Our odds of betting what he'll do in tomorrow's game are much, much harder.

That's why daytrading systems fail. That's why there's so much distrust on the internet.

You can't lightheartedly test a daytrading system and have any faith it will work in eight months. Things can change super quickly, and that system you tested for a hour or two might only work in a specific market that now has changed its mind.

But there are ways to add consistency to a daytrading system. How does one learn such things? By watching systems trade live for over five years.

So, along those lines, here are 5 tips I've learned that can make a daytrading system more robust:

1. Don't get fancy with trade size. It's easy to get seduced by the idea of betting more when things are going your way. Heck, it's what the MIT Blackjack team did, and they made millions! But the markets don't work that way. They aren't a static deck of cards. By betting 100 shares when your filter says one thing and betting 200 shares when your filter says something else, the odds that drawdown will increase tremendously are high. Or worse, the attempt to go big during a hot streak might break the system completely. By changing trade size from trade to trade, all I did was add a bunch of losing or ruin my system completely. Simple rule of thumb: for every trade, keep the trade size the same.

2. No tricky exits. I once tried to add a filter that would milk a winning trade. After all, we're supposed to let our winners run, right? Guess what? It didn't work. In a daytrading environment, keeping the trade going only brings a violent turn the wrong way into play. Just end the trade when the rules say to end the trade. Don't try to squeeze more cheddar out of a daytrade.

3. Don't daytrade on Sundays. In my first years of testing systems, I always included Sundays. It always added more money. Then when I traded the systems live, Sunday trades starting turning into losers (even though they looked like winners in testing). Because the spreads are unpredictable on Sundays, you never know what you're going to get in real life. Daytrading on Sundays is a crap shoot, and can add negative results to the bottom line (not to mention the psychological damage of losing because of the spread).

4. Have a definite target. When I was feeling especially clever, I designed some daytrading systems that didn't have a target number. I decided I was just going to let it run as far as possible (again, the let-the-winners-run mentality came into play). It tested out okay but didn't work as I watched it trade live. By not having an endpoint, the results started being all over the place. In daytrading, to have consistent results, the system has to have a definite goal.

5. Use a lot of data (the more, the better). There are famous people who say, "Keep the system in tune with the current market conditions." Those people say we only have to have about 4-6 months of data and then keep re-testing. I have found that to be not true at all. Every time I test a system with small data and constant re-testing, it does worse than just using one set of inputs and lots of data. Every time. Try to get many years of data as possible and as many trades as possible. The more data and trades you test, the more consistent it will be in the future.

If you want reliable, trustworthy consistency, then trading long-term is probably the best route to take.

But if you want to daytrade because of the seemingly limitless possibilities, then these five things should help improve your system.

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