| Winning Day Trading We Isolate Fantasy From Truth |
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| Written by Sherry Jackson |
| Wednesday, 15 September 2010 20:56 |
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I am often questioned about day trading systems. Usually what I am referring to is a stock index trading system (E-minis & S&Ps etc). I do not really have much positive to say regarding these types of methods. I do not believe I am being unfairly one-sided; I've spent more than fifteen years looking into all types of trading systems.
I am often questioned about day trading systems. Usually what I am referring to is a stock index trading system (E-minis & S&Ps etc). I do not really have much positive to say regarding these types of methods. I do not believe I am being unfairly one-sided; I've spent more than fifteen years looking into all types of trading systems. Day trading appears to satisfy the want for action and exhilaration in many traders. At times I believe these investors are not looking to make money but maintain constant adrenaline pumping through their body! From my viewpoint, I cannot think of even a single day trading system from 5 years back that is still performing today, that is right NOT 1! Perhaps a few have had periodic "comeback" periods, but I'm talking about five years of solid performance. A well recognized trading system developer who created a number of popular short term index trading systems has reportedly shared with some of his customers that even he believes they only are valid for 2 or 3 years at best (he's previously removed one from his offering and slashed the price on another). Often, the day trading systems that still appear excellent hypothetically are usually not realistically accounting for the slippage and commissions costs that eat up performance. I've witnessed a number of vendor's factor in zero slippage! When you add realistic slippage the systems go from looking wonderful to looking bad. It is logical that these day trading systems could break down. The same thing that can cause them to look so compelling is the same thing that breaks them down. When working with one market (S&P's) or sector, it becomes easy to "optimize" performance. Traders can "force" the computer to show them exceptional performance just from pure curve-fitting of that past data on that one market or sector, but when dependant on the market characteristics of just that one market or one sector what's going to happen when that market sector changes? It reminds me of the research that showed that the drop in the S&P in 1987 should have only been a once in a several hundred year occurrence based on the current data, yet it happened in the first few years of the index trading! Markets change constantly and traders need robust systems. On the other side of the pole, let's take a look at trend following methods. They are not nearly as "alluring" as day trading. You may go through extended drawdowns or level periods prior to making money, but think about this; Richard Donchain created some basic trend following rules popularized back in the 1960's. Those techniques still work today, more than 30 years later! I am not saying I would trade those Donchain methods now. I think there are far better reward-to-risk systems and approaches available (such as ours), But it strikes me as significant that longer-term trend following techniques popularized in the 60's still work today. Yet, I can't think of one day trading system from even 5 years ago that is still working today. Does that tell you something? I commit my own funds in the commodity markets with strategies that would be considered mid to long term trend following, however, I do not invest even one nickel in day trading approaches. Now, all that being said I do have something positive to say. My research has demonstrated that short term (not day trading) systems can have low correlation to longer-term systems. So the right, short term system might help smooth out the effectiveness of a suitable longer term system. Even if that short-term system is marginal on its own, it might contain a synergistic result when correctly merged. However if that low correlation is the result of a curve fit system that is certain to break down, then you have gained nothing. I do continue to commit time and study to short-term techniques. Maybe someday I will have something that I believe is worth releasing. There are far more individuals interested in a short term index trading system than virtually any other commodity trading system. Owning an excellent short term program would be in my best interests, but so far I'm not convinced that I should devote any of my own money to those techniques because of the limitations I outlined above. I do not want to release something and then have to embarrassingly do away with it a few years later! I'm afraid I've observed some others go through this already. Personally I'm sticking to what I know has been effective for a long time, and what I feel will continue to work. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. An average $150 winning trade in the Eurodollar is not going to offset an average $2000 losing trade in natural gas! It is logical that these day trading systems could break down. It can be an efficient use of capital. Trading System |