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Building a Day Trading System

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6 Steps

Building any trading system involves six steps. I will detail them below so you can see what you need to do to create your system. Just keep one thing in mind. In general, day trading is one of the hardest forms of trading that exists. Remember that.

These steps are the same without regard to the length of the bar you intend to trade. So you can use the steps to build and end-of-day trading system as well.

Let's get started.

Identify Market Conditions

Step one is to identify market conditions. However, you do this, this is fundamentally important. Think about it. What if you tried to go long is a sharp sell off? You'd lose money, but to make it worse, you'd lose money that you shouldn't. It was a preventable loss. That's unacceptable.

How do you determine market conditions? Two common ways are to use moving averages and see what way they are sloping. Another way is to look at the general trend on a higher timeframe.

Identify Setup

You may or may not need this step depending on the complexity of your system. If after you've identified the market condition, and something else needs to happen before you can trigger an entry into the market, then that is your setup.

Identify Trigger

You need to have a trigger (entry) that gives you a better than random entry. In other words over time, if you entered the market at random and exited three bars later, you'd expect to have about a 50% winning average.

Your set up has to do better than that. If it doesn't, then what is the point? You might as well enter at random.

The way to test your trigger to enter a trade on your when a signal is given (not with real money), and exit three bars later. Then measure the number of trades that ended positive against the trades that ended negative. If it's better than 50%, the trigger is a valid one.

Open Trade

In testing, open the trade per the rules. Then once it's open, move on to your exit rules.

Close Trade

Your system may have just a simple profit target, or it may have a trailing stoploss (based on the average true range, or something similar). Or even more complex, it may have both.

Test It

This is the most important step. After you've gotten all your rules on paper, you need to construct a program to test your system. Hopefully you are trading the forex market, because then you can use MetaTrader to test your system. Using a simple programming language, you can code the rules of your system and then run it on several years of data.

If you can't program and don't want to learn how, there are a number of people who can code it for you (for a fee). Search rentacoder.com or similar website.

You Did It!

After successful completion of the six steps, you have a trading system. Good job. Don't expect your first, or even most of the systems you develop to be profitable. That's just life.

Furthermore, read a lot about trading. Read books and read ebooks. These will give you ideas for your own trading systems and fuel your brain to cook out some great trading strategies.