Building an intra day trading system for trading futures, stocks, or forex is no easy task and many would say that in today’s markets it’s simply not possible.
For one thing, the markets are not at all like they used to be.
In previous articles I have blogged about the high risks involved with day trading. I have also spoken of my preference for trading strategies that combine both technical analysis AND fundamental analysis. Much like Bruce Kovner in the original Market Wizards, I find that fundamentals can add real strength to technical trading systems by first eliminating overpriced companies. In this article I will talk about a simple trading idea based on both value and trend.
The biggest problem that day traders have to overcome is the cost of trading.
Commissions and wide spreads mean that day traders need to stick to shares with high volumes and tight spreads. This narrows the playing field and means traders should stick to the most well known companies such as Apple, Exxon or Google.
The second biggest problem day traders face is psychology. Day trading is inherently stressful and can chew up and spit out even the best traders if they don’t have a strong plan. It’s for this reason that most traders benefit from implementing some sort of system.
There are many important components to a successful trading strategy but I suggest that none are as important as this:
The direction of the long term trend.
Fundamental and value traders can complain all they like but the fact is, markets move in irrational ways, particularly in the short term. Trading the trend is therefore the most reliable method for day traders. In fact, if you can correctly ascertain the long term trend you should be able to make money at least 70% of the time.
Take the S&P 500 for example. How much money would you have made by going long the index every day during the last bull market? A lot, I’m guessing.
Nevertheless, it is true that a buy and hold strategy can outperform strategies that move in and out of the market, especially when costs are taken into account.
I therefore suggest that fundamentals should be used in conjunction with looking at the long term trend.
Specifically, the idea of this strategy is to identify high volume stocks that are good value and moving in a clear direction, up or down.
The first step is to focus only on the stocks that trade the tightest spreads (0.1% or less). We can then do a stock screen on these companies to find those that are cheap on a valuation basis.
For this I will use the stock screener at finviz.com and I will only consider stocks with a PEG ratio of less than 1. This will bring up a list of stocks that we can at least say are not expensive.
Now, get rid of any stocks that have an RSI above 70. We don’t want to be buying anything that is overbought already.
Just these three steps are likely to reduce the list down to only a handful of companies. Look at each one and decide which one is showing the most consistent long term trend.
If all these steps are in place and the 20 day EMA is above the 50 day EMA, then you buy on the open and sell on the close. If the stock happens to go down two days in a row, you wait until it has at least two more up days.
And that’s it. A simple day trading strategy that relies on value and the long term trend (in my view the most important consideration for a trading strategy).
Now I don’t know if this strategy would work or not as I haven’t tried it. But the chart of Apple indicates that the idea might be worth exploring. Setting the strategy up in code and putting into a back tester to test on past data will be the next logical step.
I worked as a futures day trader for a year between 2008-2009. It wasn’t a particularly good time to start in the markets because the volatility from the credit crunch was intense. Having said that, some experienced day traders really benefitted from the increased volatility and made a lot of money.
Nowadays, I do very little day trading. I have the upmost respect for day traders who are able to make it work but it’s a style of trading that just isn’t for me. I have a hard time sitting in front of a screen all day watching price movements which is why I prefer slightly longer time frames.
Day trading is basically very difficult and most of those who try it will fail.
Source: Trading Technologies
When I first started trading I was given two products to focus on; German Bunds and London’s FTSE. These are popular futures for day traders in Europe as they are highly liquid with tight spreads. On occasion I would also trade the Dow, GBP/USD and STIRs (UK short term interest rates). We had one Bloomberg Terminal in the office and would use E-Signal and Trading Technologies to play the markets. We also had a squawk box, CNBC and 4 screens each.
Of course the simple answer is that not everyone can day trade futures. To be able to trade futures our firm had to have a large margin account with our clearing broker. Upwards of GBP30,000.
Aside from that there are high daily costs with futures trading. To trade at our firm the desk fee was around GBP100 per day and that was cheap compared to most other brokers.
This was the desk fee and included trading software, data, phone line and connections to the exchange etc. Comparatively, the cost to trade was very small at just GBP$1 per trade per contract (GBP$2 for a round trip).
So for the ordinary retail trader it’s not possible to trade futures. But, it is possible to trade futures products in other forms for example as CFD’s, spread bets, spot products or ETFs.
By using a spread betting firm or a CFD provider it’s possible to trade the FTSE100, the Dow, German Bunds, Gold or any of the popular futures products.
It’s worth noting that the spreads on these products are higher than they are for futures traders. But on the flip side, the fixed costs are much lower – no $100 a day desk fee, no huge margin requirement and there’s no concern about rolling over different quarter futures contracts.
Without doubt, day trading is a difficult thing to do. I don’t recommend day trading for most people but from my experience, the most successful day traders are those who possess the following skills:
Intuition
The best day traders are those who focus on just one or two products. They watch the tape each day (not just the chart) and get to know them inside out. By doing so they are able to trade with a high level of gut feel. That level of intuition can’t be taught, it only comes from studying the product and some traders may never learn it.
Attitude
One of the keys to successfully day trading futures for a living is having the right mentality. Successful day traders take responsibility for their trades and trade with a huge amount of discipline. Most importantly, successful day traders do not self sabotage. They have a high level of self confidence and make sure that they are compensated for the risk that they take on. They don’t gamble and they understand the relationship between risk and reward.
Number of trades
If you’re a futures trader on a desk you can place more trades because the cost per trade is smaller (although that doesn’t mean you should). On the other hand, if you’re trading CFDs, spot products or spread bets, you need to seriously cut down on the number of trades you make a day. Spreads on the major forex pairs and stock markets are low but they are not insignificant. You should try and make only one or two trades a day if you want to consistently make money.
Fundamentals
Another thing successful day traders need is a good appreciation of the fundamentals. To be sure, technical levels are very important for short term traders but fundamentals also need to be understood. Knowing how to react to certain news releases and events is essential. Combing fundamental and technical is the best way.
Technicals
Day traders need the flexibility to go with trends or to trade against the flow. Short term markets are choppier than long term markets and traders need to be able to switch from long and short easily. They can’t get caught up only playing one side of the market and they should cut losses quickly. Pivot points, moving averages and RSI are good indicators for day traders.
A lot of people get confused with day trading, primarily because of the way it is portrayed in the media. It’s important to understand that 90% of traders at investment banks like Goldman Sachs and Citigroup are not engaged in real, directional trading. What they actually do is make the market for their clients. They quote prices to their customers and take a couple of points profit from the spread.
Let’s look at an example. Say a customer rings up Goldman Sachs and wants to buy Apple stock. The trader at Goldmans simply buys Apple direct from the exchange for $90.50 and sells it to the customer at $90.60, thus making a risk free $0.10 per share.
Bank traders have direct market access and this model is how most investment banks run their books. They also use order flow and volume to further reduce the risk of their trades going wrong but this is essentially a very low risk business model.
So, this is how Goldman Sachs are able to go weeks at a time without having even one losing day. Real, directional trading can never have such a successful win ratio.
Getting into day trading?
See my favourite intraday trading techniques and check out the resources for brokers, books and systems.
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I don’t do much day trading anymore as it’s incredibly difficult to find profitable intraday trading techniques.
For one thing, it’s very hard to compete against all the algorithmic machines, banks, and high frequency traders.
For another, I prefer to trade mechanically and it’s almost impossible to come up with a profitable intraday trading system. Once commissions and slippage are taken care of, most intraday trading systems fail. And even if you do find an edge, it usually won’t last long.
Because of this, I believe it’s better to use mechanical trading systems on longer timeframes. For shorter timeframes, I believe traders are best advised to utilise both a mechanical and discretionary approach.
You can use a profitable or break-even trading system as a base, then use your experience and intuition to choose the best trades to take. I call this approach ‘teaming up with the robots‘.
Because, if you can combine the human mind with the computer, it gives the best chance of success. (And this is how humans were able to beat some of the most sophisticated computers playing chess).
This is the essence of how I trade and I maintain a number of short-term and long-term trading systems which I use to manage my portfolio. These strategies have been tested on historical data and work during different types of market conditions. As well as this, I keep a separate pot of capital available to capitalise on short-term, intraday opportunities when they arise.
What I never do anymore is watch the screen all day. I simply don’t enjoy watching price charts move for hours and find this an immense waste of time. Especially when there are so many more fulfilling things you could be doing with your life. That’s why I use these trading systems and I spend less than an hour each day updating and organising my trades.
But don’t get me wrong, chart reading is a definite skill and if you want to be a good day trader, then you will definitely need to put in some serious screen time. It takes a lot of practice to become adept at reading charts and I believe the most important aspect of this is watching how the charts react to certain events. This is what I have had the most success with during my time, and in my mind, this is the key behind predicting future price moves.
But now let’s get into my four favourite intraday trading techniques. These are the ones I’ve had the most success with in the past:
Before I worked at a trading firm I had never heard of pivot points but these days I think most traders know about them.
Pivot levels go right back to the days of the trading floor and before the decimalisation of securities but they’re still used today by lots of intraday traders.
Because so many day traders and ‘locals’ look at pivot levels, they provide excellent levels of support and resistance in the market. Everyone is looking at them which means they are more likely to provide significant turning points. They have a simple calculation which is calculated using yesterday’s prices and this means that the levels constantly adapt to the market.
I’ve worked at two day trading firms now and in both companies, traders would look at pivots. Even if they didn’t directly trade off pivots, all the traders had an idea of where they were and what could happen when a pivot point was approaching.
Always remember that the pivot is the most important level. When the market is above the pivot it’s a bullish signal and when the market is below the pivot, it’s bearish.
Accordingly, some traders will only buy when the market is above the pivot, and they will only take short trades when the market is below the pivot.
The other support and resistance levels are usually very good levels to take profits and manage the trade.
Occasionally, when the market is particularly overbought or oversold (look for a high RSI or momentum score) the levels can be used to take reversal trades.
Take a look at this recent example in EURUSD. You can see that the market touches the key pivot levels regularly; pivot, R1, R2, S1 and S2 particularly. Traders know where these levels are so they often take their profits and make their trades around the same place.
*Charts courtesy of IG Index.
One strategy? Buy when the market pushes through the pivot with conviction then take half of your position off at R1, and try to sell the rest at R2. You can keep your stop below S1, and use the distance between S1 and your entry to calculate your position size (based on an attractive risk:reward ratio).
For example, if the difference between your entry and S1 is 30 pips, you could make your profit target 60 pips away, looking for a 2:1 risk:reward. You can use the levels to further fine tune your best exit points.
Also, keep an eye on momentum and other indicators like RSI, moving averages and Bollinger Bands. As you can see from the next chart, if RSI is overbought and the market is at a resistance level (like below) that’s going to be a good time to sell. Similarly, if RSI is oversold and the market is at a support level, that’s an extra reason to buy.
In another article, I look at pivot points in depth and I test these levels using historical data to see if a good trading system can be developed. Check it out when you have the time.
Another effective method for intraday trading is to trade news releases and economic reports. When a positive piece of news comes out you want to buy the market and when a negative piece of news comes out you want to sell.
Of course news trading isn’t as easy as it sounds, especially when you’re a retail trader and banks and hedge fund traders have access to all the quickest news feeds and inside sources. High frequency trading (HFT) algorithms, for example, are able to analyse and react to economic reports in a split second, making it impossible to compete.
The solution then is to stick only to the biggest news releases that actually move markets and to use your intuition to take the best risk:reward positions.
In some cases you may want to take a position before the news item comes out. That way you may be able to manage your trade and get in before the move. Again, it’s not easy but big profits can be made if you get on the right side of the trade, as proved by these traders who gained illegal access to economic statistics and made millions.
Predicting the outcome of economic releases or earnings reports might not be possible but it is possible to analyse price action and to make careful risk-based bets.
For example, if a strong, positive, piece of news comes out and the market struggles to go up as it should, that’s an important sign that should be taken account of.
In this instance, price action is suggesting that there are not enough buyers, even though the market has just had good news. That means resistance, and when the good news wears off, or when bad news comes out, the market could easily fall.
Being able to interpret price action in relation to events is absolutely key.
Just recently, US non-farm payrolls came out worse than expected but the market barely budged. Why? Because there simply wasn’t enough sellers to take the market lower. Markets take the line of least resistance, so when the bad news had been fully absorbed the market ended up going higher.
Plenty of news releases have no effect but the best news releases for futures traders are listed below:
– Non-farm payrolls (Average USD pip movement of 100-150 pips)
– Central bank announcements (interest rate decisions especially)
– Retail sales (Average 80 pips)
– US Trade balance (Average 70 pips)
– US CPI (Average 70 pips)
The key with news trading is not to follow market sentiment; you need to work out what the market is expecting and if need be take a position against the crowd – if the probabilities are in your favor. For example, if the market is pricing in a 70% chance that the Fed will raise interest rates and you make it to be just a 25% chance, then going against the market offers a trade with great risk:reward.
News trading can be profitable but generally it requires quick thinking and a bit of preparation. Whatever it is, it’s always best to try it out for a while on a trading simulator.
Quantpedia
If you are interested in more news and event-driven strategies you may want to check out Quantpedia which has a database of over 200 quantitative trading strategies for stocks, currencies and futures. There are strategies based on events as well as longer-term methods and this is one of my favourite resources for finding trading ideas.
Scalping requires skill but is one of the most popular intraday trading techniques. The scalping method is to take lots of trades with short holding times, hoping to capture one or two pips here and there, building them up as you go.
Increasingly, traders use algorithms to calculate minute inefficiencies in the market and scalp a couple of ticks here and there, particularly in the forex markets. It goes without saying that scalping requires extremely tight spreads, a lot of practice and a lot of skill.
If you get involved in scalping it’s also a good idea to sign up with a rebate company as you can get back some of your commissions that way. But I would certainly stay away from any intraday trading system that claims to scalp the markets as it’s probably not true.
I’m not a huge fan of scalping as it’s generally a technique that requires a lot of screen time and discipline. It’s not uncommon to see scalpers build up a month worth of profits and wipe them all out on a couple of moments of weakness.
Often, short-term trades are no better than a coin flip and you would have just as much success going to the casino and betting on black at the roulette table.
However, another time that I will engage is if I see an opportunity come up that is too good to miss.
For example, maybe a stock has been sold too aggressively on a bad earnings number, or maybe there’s been a natural disaster, or a shock event. There are opportunities in these trades but they don’t come around that often.
They usually involve a great amount of uncertainty and emotion. So the key is usually to take a contrarian position (trade the other way to everybody else) then stay disciplined and try not to budge.
For example, the massive sell-off in USD/CHF in January 2015 when the Swiss national bank removed exchange controls against the euro and the franc rallied by historic proportions. This was an unforeseen event that caught many forex traders by surprise and sent some forex companies into liquidation.
But as you can see from the chart, there was also a massive over-reaction (due to forced selling) and taking the opposite side of the trade the very next day would have been the perfect time to buy. As is clear, markets often overreact and it often pays to go the other way.
As another example, remember the flash crash of 2010 when the S&P 500 dropped almost 10% in a matter of minutes. This would have taken out many traders but if you were alert and on the sidelines, you may have been able to jump in and make a quick profit when the market rallied off the seemingly oversold position.
Finally, here’s a chart of the Japanese Nikkei after the tragic earthquake and tsunami in 2011:
At the time, there was widespread panic, devastation, chaos, and everyone sold their Japanese holdings out of fear. It’s not nice to profit off of a natural disaster, but if you had said at the time “I think this is a bit overblown, I think Japan will be alright” you would have made money buying the dip. And in a way, you would have helped support the country in it’s time of need.
Looking back, the Nikkei did end up revisiting those lows but at the time of the disaster, there were fast profits available for intraday traders reacting to events.
– See my post: 20 day trading strategies for beginners for even more intraday trading ideas.
– See an example of an overnight trading strategy.
– You may also like my list of the best trading courses for beginners.
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Thanks for reading!
