2/5 How To Trade Day Trading Strategy: Backtest

We all struggle with building trading system. Phases like „holy grail of trading“ or „how to be profitable trader“ in google matches so many useless results from forums full of beginning traders looking for the method that has 100% win ratio, no loses, big wins and works anytime they want and need.

At the beginning the biggest problem ever is using google in hope to find something that does not exist, unfortunately.

We all know that. The need of know what other traders use, how do they trade, what indicators do they use, their trading system explained from A – Z and lots of stories about people who became profitable and known. (over night)

In the foreground there is only one enemy that extends time needed for becoming better trader. It’s You.

I am going to tell you worth million truth. If you would give two people the same trading system they’ll have different results, different analysis, mindset and even different way of drawing trendlines, support and resistance zones. It provides different entries based on your technical analysis. Both may be profitable but with different results.

Trading is about finding the right method that absolutely fits your strengths and makes you feel absolutely calm during trading. The system that allows you accept loses without any emotional affects.

System that may not work for anyone else but for you it’s the right one.

Lots of people try to trade methods or systems of known wealth traders in the belief it makes them rich too. Sometimes it works and sometimes it doesn’t.

The truth is that the easiest strategies provides the best results. Why? Because the best traders trades easy patterns you already know (double top, double bottom, role reversal, triangle, etc.) and they are aware fact that indicators are useless. Pure chart is holy grail.

How to build day trading system

Firstly you need to know which instrument you are going to trade – futures, forex, stocks, bonds and then the right timeframe which should accord your free time. If you have family or less free time, 1M or 5M timeframe is still acceptable for you.

Well, lets create imaginary friend called Jack for better explanation.

Our newbie friend just read all the stuff and basics about markets and he’s about to build his strategy. Due to being single and having job that allows him to study charts and trading every night for 2 hours before he fall asleep, looking for trading system that fits his strengths.

But firstly..

Do you even have a time for day trading? Are you ok with kicking off all distractions – social medias, TV and other kind of rush for 4 hours? (Why exact 4 hours? My strategy brings the best results and offers entries mostly from 17.30 – 21.30 ( 5.30 PM to 9.30 PM). So that’s why I am trading only 3-4 hours a day.

Lets guess you do.

After realization that time is not problem, building strategy moves forward to choosing the right instrument that has:

  • High volatility (necessary for day traders)
  • Fits your financials (forex is tradable from 200$ or even less, futures starts from 3000$ from legit brokers)
  • Nice swings, usually more predictable moves than others (how to find out which one, read next article – 3/5)

Practice

Look at chart bellow and tell yourself if there is any price action pattern. Be honest to yourself.

Price action chart

As you can see market is in strong downtrend making nice swings with lots of potential entries (if you see them).

Now look at my view.

Price action patterns

Sorry, there were also 1-2-3, triangle, and 2b reversal. But I didn’t want to make it confusing.

Once you study these patterns enough you start to have dreams about them at night, then you’ll see them everywhere even in real life and, what’s the most important – in charts.

After you do your homework and study these patterns which are highly recommended and easy to notice then I would suggest to use sierrachart or Ninjatrader – those softwares for replaying instruments allows you play or move forward any chart you want in ticks or pips.

While replaying chart you should choose only ONE pattern and draw it into the platform and write down to your trading journal. Collecting about 150 – 200 trades should be enough to later determination if the pattern is profitable or not and when the pattern is usually winning and when it does not. As I said, it may take about 30 hours to write down 150 presences of pattern. Time of presence is important because if you find out pattern presences between 16:00 – 19:00 you do not have to sit behind screen for the whole day.

This part may seem boring and annoying but try to remember how many shitty works you done for your school for someone you probably didn’t like. All you do in trading is done for YOU. There is only one person who will thankful for all of this – it’s still YOU.

In the end, you’ll know your risk reward ratio, if you wrote down 200 trades, 130 hit stop loss, 70 were winners – wow, you are on successful way!

Please read the article about trading journal and which stuff are recommended to write down.

What to do now

Download sierrachart(dot)com on their websites, register and download all instruments you want to backtest. For free 14 days you have law to download anything you want in endless limit so use it for yourself.

Sierrachart is probably more complicated for use, but give it a time and you will control whole software within 2 hours.

Conslusion

Next article will contain practice tips how to get higher RRR than 1:3 from trades you usually take and which offers only about 1:1,5-2 and another tips where to place your stop loss and profit target. But firstly do your homework.

P.S.: Use those money management tips.