Building a day trading system

L

liltrdr

Hey everybody. I'm a beginning trader and I'm trying to build a simple system that actually works for intraday trading. I'm not trying for a magic mechanical system that guarantees profits. Just something that follows proper principles (goes with trend...) and gives somewhat of an edge.

I started off by looking at the best way to get a feel for the market. I decided to use realtimefutures.com's market squawk box combined with Esignal for charting. I decided to look at the two minute and five minute charts for my time frame.

Right now I'm working on entry and exit. For my entry, I decided to use a simple moving average (9, 18, 27) for signs of a trend. When the three cross and create a "bowtie", I think it's a great sign of a strong trend either way. My question to you guys is, does this actually give me a positive edge? Is this a signal that pushes my odds above 50 percent?

Next I'm thinking of adding an overbought/oversold indicator like stochastics to get an edge in sideways markets.

After that, I decided to add some basic patterns I've noticed like if a market makes three "humps" at around the same support/ resistance numbers, and then it breaks through either one, it means a fairly strong trend. This is it so far.

Hopefully, I can research enough to put something together. If anybody has any ideas or criticism, I'd appreciate it. Right now, I know that the moving averages will definetly fail in non trending markets. Are there any other weaknesses to them? And vice versa for momentum indicators. Anyway, have a good weekend. :)
 
liltrdr,

For my entry, I decided to use a simple moving average (9, 18, 27) for signs of a trend. When the
three cross and create a "bowtie", I think it's a great sign of a strong trend either way.
That's true, it's your variation on MACD. Not sure why you selected 9/18/27 (other than them all being multiples of 9), but there are other problems.

I know that the moving averages will definetly fail in non trending markets. Are there any other weaknesses to them?
Main weakness is that they lag price movement. Waiting for only two to cross (say, 9 and 18) will already lag it a fair amount; waiting for three to cross (especially when the third is 27) will lag it even more.

It all comes down to your timeframe. Are you scalping? Intraday swinging? Multi-day swinging? If the former, the scalps will have come and gone by the time your MA's cross.
 
I guess I'm swing trading intraday. There is no way I have the speed of execution for scalping. My holding period is an hour tops. But I don't make more than five or six trades a day. You're right. The sma does lag. But do you think it is actually an advantage in terms of the trend being confirmed? Do you think MACD is a better indicator?
 
liltrdr I think this is the worst time, especially for a newbie, to be depending upon these indicators. This market, I believe, borders on the absurd--so these are indeed extraordinary times we live currently-I'm sure some day soon, however, TA will make sense again. All-only my opinion.
 
I recommend not using moving averages. They almost always lag the move. What good is it if you aren't in at the bottom of the move? Then you're just chasing.... That's the definition of bad. I think you'll be much better off just fading the inordinately large moves in both directions. If you pyramid into a move at it's apex... You're bound to get at least your largest fill within a few cents of the apex. This will give you a great average price no matter what. Once the move has reversed, you can feed your inventory into the reversal slowly and then fade out at a good profit. That's at least how I trade. Don't forget that 85% of the time most markets just rage, therefore looking for true moves is difficult, cause they are rare, and fakie's are far more common.
 
No disrespect to limbo's comments, but as a newbie I would not be worried about approaching the markets with a mechanical bias but rather without one. For the very fact of what limbo mentioned is that the markets at times lately to appear absurd. For a "newbie" to approach the markets without anything to go on is imho risky. It is too easy for a newbie to get caught up in the speed and emotion of the market having not yet developed a gut feel for market movement which will take time to develop.

Magna's comments on ma's are correct in that they do lag price movement. But that is exactly what a system based on ma's is supposed to do. It's not supposed to help you pick a bottom but rather ride "the meat" of the trend. Don't be concerned with your holding time (where you mentioned an hour tops). Working with ma's and having a concrete hold time are not always compatible. Let the market help determine your holding time along with your gut feel about the situation. So scalping based on ma's is probably not a good idea (unless you scalp small profits after you identify a trend based on the ma's, but this is not true scalping per se).

Also consider that using very short time frames (i.e.- 1 to 3 min) may cause many false crossovers and that using a triple crossover system on such a short time frame may cause you to miss the bulk of the move. Shorter time frames are less dependable than longer ones, and it is with these longer time frames that, in my experience, ma's show their worth. For example, an intraday trading system may involve indentification of a crossover on a 15 min chart while using a 3 min chart for entry & exit points; or a 60 min chart for the big signal and a 15 min for entry & exit; or for multiday swing trading a daily chart for the crossover & the 60 min for entry & exit. Of course with each combination, the time involved for movements must be accounted for, which will accordingly affect your stop loss, position size, profit target and other trade management parameters. As mentioned above, it is my experience that it is best to let the market determine how long to hold or at what price you will exit with a loss or profit.

Sorry for the long post & good luck.
 
Sallyboy I didnt say dont use these indicators and walk blindly into the night---I said don't depend on them-two different things. In fact I'm telling liltdr he should look for more evidence before executing or perhaps don't even participate in the mkt now--watch. Also there is no trend.
 
limbo,

Not that you were suggesting to "walk blindly into the night", but I wanted to make the point that while the markets may seem absurd lately due to the recent events, technical analysis can help make sense of the absurdity. Technical analysis is supposed to make sense of what appear to be random price movements.

So I agree, but wanted to expand upon it.
 
Since im a newbie too liltrdr dont take this as dogma, just some thoughts.

For a newbie trader to jump into this market with a system such as your proposing sounds a bit nuts, no offense. Like the other traders have said the market is whippy and wild right now and smooth intraday trends are hard to come by.

If I were you I would forget the indicators all together and get back to basics. I mean real simple, patterns or price action. Everything else is just an extrapolation. Even better look for Leading indicators, not lagging.

If you jump into the market with a system that lags and you are new, so im guessing that execution could be a bit slower than desired, your going to get your head chewed off either by others who are quicker or smarter.

If you want to intraday trade, and why not i say, then I would jump back a time frame and base your intraday decisions off of daily patterns. The advatage this gives you is time and piece of mind. Maybe i should say presence of mind.

If you are basing your intraday trades off daily bars then you at least know exactly where you are getting in and what your stop loss will be and what your position size should be and how you will add on if you decide to and finally how you will get out.

All this before the bell.

Make a plan like this and write it down and I give you 50/50 or better. But what the hell do I know im just a newbie too.

Trav
 
One more thought regarding what most today would agree are volatile markets: take profits when you can, not when you have to. In other words, after you have some profits, don't be afraid to start taking them off the table, instead of waiting for the market to work back and take them from you. Of course, trading is a balancing act, you also don't want to get in the habit of cutting winners short while letting losers run. Learn to adapt your strategies to market conditions.

Good Trading!
 
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