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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: Magnatizer who wrote (4393)	9/23/1999 9:18:00 PM
From: Eric P	Read Replies (1) \| Respond to of 18137

I would like to discuss development of a trading system. I think this sounds like a great topic. We should be able to generate a lot of good discussion here, hopefully something substantial enough to put in the thread summary. I'll let someone else take the first whack at it, as I have a lot to do still to get ready for the trek west to the Expo tomorrow. -Eric P.S. Expo countdown: 1 1/2!

To: Magnatizer who wrote (4393)	9/30/1999 10:07:00 PM
From: Eric P	Read Replies (3) \| Respond to of 18137

I would like to discuss development of a trading system. Not actual systems which are already developed but steps involved in developing a system suited for an individual. Returning back from the Expo, I noticed that we haven't given this question much of an answer, yet. So I'll make an attempt. Development of a Trading System Development of a successful trading system is a very difficult process. A trader will typically go through many stages of development before feeling comfortable and successful with his or her system. Initially, it is time for the trader to be in study mode. The intended daytrader needs to learn everything possible about how the markets work. They should understand about all of the order execution methods available and when to use each. They should learn about liquidity problems and how difficult it can be to get orders executed. They should understand about discount brokers and how they will also screw you at ever opportunity. Basically, they should make an attempt to learn everything possible about the markets without losing a dime trading. There will be plenty of time for losing money... This is no time to get eager. This is a good time to read every link in the latest thread summary post (#Subject-28776). Once the market is well understood, it is time to go into watching mode. Now is the time that the trader needs to begin very careful watching of the market during the day. For short term traders, access to intraday charts (I prefer 15 minute charts) is a must. In addition, I believe Level II quotes are very important as well. Some traders have learned to be quite successful without Level II, but I prefer to have every possible piece of information available, and I wouldn't consider trading without Level II. This is not a time for trading. Your goal is still to learn, and learn inexpensively. Perhaps your Level II data / charting costs you $250/month. => Big deal. If you cannot afford to 'invest' this small of sum in your education, then you don't stand a chance in the market. During this period of intensive study, you will tend to notice certain apparently re-occuring patterns. When you think you see one of these, write it down and continue to monitor for this kind of situation in the future. As you continue to develop confidence in the repeatability of this pattern, don't trade. Instead, begin to 'paper trade'(#reply-9983389). Don't worry about the huge sums of money you are 'losing' by not actually taking the trades. If your system proves to be successful, there will be plenty of time to cash in big later. In the meantime, continue to paper trade. Finally, when you are almost certain your new system will make a fortune go ahead and make one trade, and with only 100-200 shares. Compare how well your trade performed versus your expected paper trading results. If your actual trade was much less profitable than expected, find out why. Ask a question on this thread if the answer is not obvious. Assuming the trade is profitable and matches your paper trading results, continue to trade. However, if your actual trade is much worse than expected, try to determine whether this problem will elimate the expected system profits seen during your favorable paper trading results. Perhaps attempt a few more trades to verify your expectations. Do not lose a fortune to realize that real trading is much more difficult than paper trading. If you find that your system cannot turn a profit in the real world, that's okay. Cut your loses and move on. It may be time to go back and refine your system, or return to watching mode looking for new patterns in the marketplace. The best way and perhaps only way to learn is through losing. Just try to do it as cheaply as possible. => Let me digress a bit... I have always enjoyed gambling in a casino. It is fun. It is exciting. And anyone with any sense realizes, it is a losing proposition. Therefore, I find that I can have just as much fun losing money on the nickle slot machines as I do at the dollar slot machines, and I can do it a lot longer at the nickle machines. It's the same way in the stock market. Begin by trading infrequently and with a small number of shares. Chances are very good you will lose money in your early trading experiences. Do so with small sums of money. Once again, the goal should be to maximize your ratio of knowledge gained to dollars lost. These early steps can take 2-6 months or more. If you find you are still unable to find a profitable trading system, then you should consider 'investing' a few more dollars to learn trading techniques from elsewhere. I have heard that TraderAlan's web based course is very good (http://www.hardrightedge.com) and I have personally been to Pristine's 1-day and 3-day seminars (http://www.pristine.com/seminars.htm) and learned numerous (10-15) very good trading techniques. Some people may want to try these kinds of training courses even before they begin their intensive study of the markets. Once a successful system is identified, the trader must be sure to consider good money management. A good rule of thumb is to trade about half of the size you feel you should trade. Typically, people trade too large of positions, and are inevitably devastated by the occasional large losses that eat up 10-20+% of their account. OUCH! Loses such as these can be painful to your account and even more devastating to your confidence as a trader. The combination of a successful trading system and good money management practices will ensure that the trader can consistently make money in the marketplace. I don't want to make this sound easy, because it certainly is not. Therefore, let me stress the importance of only trading with risk capital that you can afford to lose, AND, trying to come up on the learning curve as cheaply as possible by not trading heavily until after you know you have found a successful trading technique. Good luck, -Eric