TRADING SYSTEMS
On Building A Profitable Daytrading System
Tuning Intraday Strategies
by Lee Leibfarth
Here are some things to keep in mind when you're assessing your daytrading strategy.The growing availability of trading platforms that can build, backtest, and automate intraday trading strategies is allowing more and more traders to develop and test their own unique daytrading ideas. Constructing a rule-based daytrading system using historical data can help traders develop sound, statistical logic and create a higher level of confidence in their strategies.While most traders are familiar with the reminder that "past performance is not indicative of future results," there is an amazing amount of confidence that can be generated from positive past results. That said, correlating the results of historical testing versus real trading for the same system is as important as the trading logic itself. Unfortunately, this aspect of system development is often overlooked as many traders look for incredible historical results instead of tuning their systems to actually fit their intended markets. This article will discuss some ideas for getting better correlation between system testing and actual market trading.
Developing daytrading strategies often requires a unique approach to the markets that may be contrary to popular conventions in trading system development. Daytrading strategies are often specific to their intended markets and are not necessarily profitable across an entire portfolio. A system designed for the emini Russell 2000 does not need to show a similar expectancy on the QQQQs (or rice, crude oil, or Treasury bonds, for that matter). These markets trade at much different volumes and with much different volatility. Developing a daytrading strategy that works on everything is almost impossible and can greatly compromise the profitability of the target market.
DEVELOP A PROCESS
While actually putting together a daytrading strategy is the fun part, taking some time to step back and develop a process for evaluating trading strategies is equally important. Before starting to write and test a method, it is important to objectively set up the criteria by which it can be assessed. This becomes increasingly important as traders optimize a method, develop multiple strategies, or apply techniques to multiple markets. In addition, it is easy to develop a bias for a particular trading system based on statistical performance alone. Traders need to be mindful of the experience of actually trading a strategy or system. Will taking 30 trades a day or, alternatively, one trade a month really fit a trader's individual personality or trading style? These are important questions that traders should resolve before system development begins.
...Continued in the February issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the February 2007 issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
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