Alton Hill is a Cofounder at TradingSim. He has a passion to help people and found that one of his ways of doing so, is through the world of Day Trading. Alton’s skillset is in Product Development and Design Thinking which he uses to write and improve the overall experience for TradingSim.
Have you been lured in to the idea of making 400% returns per year using a day trading system which automatically places buy and sell orders for you? These systems may make claims to have been independently audited to prove their accuracy while some may even go as far as showing you actual bank statements.
So then you may ask the question, “should I invest in these day trading systems which clearly have a great track record for success?” From our experiences, there are very few systems out there that actually generate consistent profits for their users over the long run. You will find that most day trading systems will work well for a period of time and then blow up in your face.
It is a fatal flaw to assume that a stock day trading system can work well in every market environment. For example, there are a few Forex day trading systems out there which took advantage of the EUR/USD rally over the past few years. These systems were configured to take advantage of a bull market; however, when the bull market in the EUR ended in 2008, the system wiped out massive amounts of capital within a few weeks. This is a common occurrence with most day trading systems.
Just think about it, if you had a great system which produced massive gains, year in and year out, would you share it with the public? When something becomes too popular, it ceases to work as it did when it was unknown.
Additionally, if you purchase a day trading system, you will be relying on a system which you have absolutely no insight into. You are investing in a black box with the hopes of it working out. Be careful investing money into systems which have no stop loss rules. As silly as this may sound, it happens far more than you would think. Why do you think you see day trading systems advertising a 98% win rate? It may actually be true; however, the 2 trades out of 100 which produce losses are capable of wiping your entire account balance away. Never believe anyone that tells you that you can win 98% of the time; it is just not possible without reckless money management rules.
If you are going to use a stock day trading system, it is best to be discretionary in your use of the system. Using a system to find you some potential trading candidates is fine, but you should own the trade. This means you will decide whether or not you take a trade, where to enter and where to exit. Some traders find that it is too difficult to manage their emotions once they enter into a trade. These traders may activate a money management system to manage the trade after it has been placed with a predefined set of rules.
If you are a hands off trader and prefer to use a day trading system, be sure to understand the basic rules of the system and more importantly, understand the risk management rules built into it. One of the most popular automated day trading platforms is Metatrader. You can insert “expert advisors” which will basically do all the work for you. These advisors will work as long as your internet connection is working; therefore, get some server space which is guaranteed to be up and running so your day trading system will have no problem sending buy and sell signals to your broker.