Three Core Attributes of a Quality Day Trading System

Throughout my career as an institutional trader I have learn to day trade several different systems that are effective and profitable. These time-tested systems usually contain
three important characteristics which are worth noting. All contain some emphasis on price action or price movement. Nothing is more basic or essential to a system than what the price movement of the traded equity is doing, and the manner in which price is behaving. Price action analysis is among the oldest disciplines in trading systems, and its importance has not lessened over the years. As a matter of fact, there are systems based solely upon price action. Any discussion of price action methodology would require a discussion the size of a small book, as there are many interpretations of the relationship between price movement and the market prediction. Like all things in trading, some price action analysis is quite effective and other analysis is not as effective. It will take some investigation and research for the average trader to determine which price action methodology best suits the trading style he or she intends to employ.

A second characteristic of a good trading system is the utilization some form of indicator or oscillators. In a recent years, indicator and oscillator based systems have gained great popularity. Again, there are trading systems based solely upon oscillator indications. I caution against using systems employing only oscillators, as there are some inherent weaknesses in this methodology. Of utmost importance and evaluating oscillators is the tendency for them to be lagging indicators. Most oscillators receive information from a data feed and apply a specific mathematical formula or analysis to this data. Therefore, by definition, oscillators tend to lag the market and you may find yourself a step behind the action if you rely solely upon oscillator based trade selection. There are a number of oscillators that claim to be leading indicators, but their effectiveness as leading indicators is generally dubious, at best. On the other hand, it is possible to glean a tremendous amount of information from oscillator and indicator analysis and I do not mean to lessen or demean their importance. My point is a simple one, oscillators and indicators are generally lagging indicators and understanding this weakness is essential in employing their use in your trading system.

Finally, I think it is important to have information or a data feed coming directly from whatever underlying security is being traded. For example, I trade primarily the financial index e-mini futures, so I am particularly interested in raw data from the New York Stock Exchange. To accomplish this goal, I generally like to use the NYSE tick. This particular indicator compares advancing and declining issues on the New York Stock Exchange and gets no information or data from the futures exchanges. Using this raw data, I get a bird's eye view of what is actually occurring on the exchange. I feel this is a distinct advantage in my trading, as the futures traders have not always reacted to the New York Stock Exchange price movement and I am therefore aware of the trends, or lack of trends, that occur in real-time. Oddly enough, when I have introduced this indicator to traders who have relied solely upon oscillators they are often amazed at the added depth of knowledge they acquire when comparing the NYSE tick and their familiar oscillator based indicators. For that reason alone, I believe it is important to employ data that does not come directly from the futures exchanges. Quite simply, data derived directly from the exchange of the underlying security will supply you with information you might not normally be accustomed to using.

As you can see, I like using trading systems that are multifaceted and give me a broad view of market movement. It is my opinion that trading systems that rely upon a single indicator often result in a skewed market viewpoint. Above all, when I day trade I want to develop the fullest understanding of the market movement possible, and I accomplish this by looking at the market from several points of view.

I am a long time retail and institutional trader who now only trades part time, usually in the morning. I enjoy writing informational articles about my style of trading so others may benefit.

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