Is This a Good Day Trading System?
May 7, 2008
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John Forman - The Essentials of Trading author
Here’s another question I received from a trader, in this case about day trading the mini S&P future.
I am currently evaluating a system that is profitable 85% of the time locking in 2 ticks (nett 1.6 ticks) each trade (on the ES). The other 15% of the time it losses on average of 8ticks (nett). The system developer advises to stop trading once the system made its 4 ticks profit(gross) the day. From your experience, does this sound like a viable daytrading system.
A good starting point in assessing any system is to determine it’s expectancy. That means what you would expect to make, on average, each trade. In this case we have the required figures to do that.
( 85% x 1.6 ) - ( 15% x 8 ) = 0.16
What I did there was take the win % and multiply it by the expected winner. That comes out to 1.36. Then I took the loss % and multiplied that by the expected loser, which is 1.20. Subtract the loser from the winner and you get 0.16 as the expected trade performance.
This doesn’t strike me as being a good system. It would average an $8 profit per trade, before commissions. If you pay less than that per trade and the system presents a lot of signals each day, maybe it’s worth it, but just on the face of it I would think you could do much better.
Here are some other posts which might interest you:
Hi John,
To the trader who asked you if this system is a good day trading system.
The developer of the system tells you to quit if you make 4 ticks in a day. what does he advise on the loss side? What if, just thru randomness, your first two trades are losses. You’re down 16 ticks. Are you supposed to quit for the day?
Or are you supposed to keep trading until you make the 4 ticks.
This can happen in your system because its incorrect 1.5 times out of 10.
Seems like risk/reward isn’t that great. Just my opinion, but I think you could find a system that does a lot bettter than a 0,16 return.
Thanks John for your reply, and Lou for your input.
the 0.16 is Nett profit. In a day the system can give more than 20 signals, but I usually trade between 930EST to 1300EST on the ES.
It sounds great on most days that I can finish trading the first few minutes-30 minutes using this system as I can stop at 4 ticks profit (2ticks x 2 trades only). I pay USD 5 per round turn. So, my nett profit is USD 20 per contract.
The issue of losing streaks in the first 2-3 trades for a particular day did occur, I will trade until I am profitable and then stop. So far I manage to do that in the last 60 days. On few days I need to be glued to the screen for 5 hours straight. But most days I’m done in 30 minutes.
When I’m losing, the strategy changes a bit, I won’t be looking to make 2 ticks in each trade. I will ride the trend tring to get as much ticks as possible to recover. This seems a little riskier, but I am already down so much for the day, taking 2 ticks will take me ages to recover.
My worry about this system is that I might one day will not recover (out of exhaustion since 5 hours watching the screen continuously can take a toll on my concentration and execution). I might take a losing days. When or how much losses I can take before I stop? Thats the penultimate question.