Day trading strategies – how to build a trading system

To develop a reliable day trading strategy has a lot to do with statistics. But you don’t have to be a rocket scientist to understand this subject and to build a day trading strategy. It is only to see what works and what does not.

The idea

It all starts with a simple idea. For example, you have an observation that every time after the gold fixing at 15 o’clock (UTC) in London the price reverses. Now you have to prove speculation, because until now it is nothing more.

You take a look at the gold future index price or the SPDR Gold Trust, which is an Exchange Traded Fund (ETF).

ETF has a lot of advantages:

  • cheaper
  • flexible
  • segregated money
  • transparent
  • liquid

Let´s see the advantages in detail:

Mostly ETF is cheaper than fonds because they were not actively managed by an expensive management. Instead they have a clear and easy to follow rules, how and in what to invest.

Furthermore they don’t have any price difference between ask and bid price, exept the normal spread like shares. But normally this spread is low (see liquid).

ETF is traded at the exchange the whole trading hours. Fonds have sometimes only one or two times a day, where you can trade them. Therefore ETFs are more flexible and convenient for the investor.

Segregated account
The wealth of the ETF is in a segregated account and does not belong to a company which uses this money for other tasks or investment.

The composition of the ETF follows a clear rule. Additional the assets of the ETF are public information in contrast to fonds, which follow their own proprietary strategy.

For ETF exists Market Maker, which always offer bid and ask prices. Therefore, you can always trade them with a small spread. You should also know that some of the most traded assets at the exchange are ETFs.

Building a day trading strategy

For our further investigation, we will look at the SPDR Gold Trust and trade a fix amount of 100 shares, because we want to develop a day trading strategy.
The price per share is roughly  $100 Dollar. This means, that we need a capital of at least 100 shares * $100 = $10,000 Dollar.
We have to examine, whether the assumption is correct or not. Therefore we have two possibilities.

  1. Take a look at the chart and count
  2. Write a small program and count by computer

The first option seems to be easier, but it has some disadvantages:

  • It is made by hand and you can count wrong
  • For bigger sample it will take a lot of the time
  • If you decide to make a small adjustment to your assumption, you have to do the whole work again

To write a small program has some advantages:

  • You have to think first
  • You have to be clear about entry points
  • You have to be clear about exit points
  • You will get all statistic data at once
  • You will get some performance graphs as well
  • You can use big data sample

The program

In this example we want to use the power of the computer. We will do it with Tradestation and write a small program in Easy Language. This is a programming language especially for trading and it uses expressions like “buy”, “sell” or “sellshort”.

We open a chart with 30 Minute bars. Our idea is, that the first 30 minutes (= first bar)
a) the price goes up and then it will go down or
b) the price goes down and then it will go up.

I will show you this little program here:

If Time = 1000 then begin
if open < close then 
Sellshort ( “Short” ) next bar at open ;
if open > close then 
buy ( “Long” ) next bar at open ;

If Time = 1600 then begin
If Marketposition = 1 then
Sell (“EoD Long”) this bar at close;
If Marketposition = -1 then
Buytocover (“EoD Short”) this bar at close;

The first section starts at 10 o’clock and contains the two entry conditions.
The second condition is the exit strategy. At this point it is very easy. We exit at the end of the trading day. If we bought (long) we sell at the end of the day and if we sold (short) we cover our position at the end of the day.

The first result

Now let’s use the advantage of the computer and the big software, that comes with Tradestation. They deliver all the numbers we need:



The first impression is, that it is a good idea, because the Total Net Profit (first line and row) over 1,000 Dollar. The next two rows tell us about the profit of the long and short trades. We see, that the short trades were more profitable than the long trades.

Now, let’s skip to the first line in the next block. There we see the number of trades we made. It was in total 244. The considered time frame was the whole year 2015. Obviously we had 244 trading days, but some of them have early closing time. You should be aware of this, because it can distort your results. But at the moment we want to skip this problem.
We see, that the distribution between long and short trades is nearly equal. This is a good sign for a trading strategy.
Interesting is, that despite we were only less than 50% right (next line), we still are profitable.

The next block tells us about the average trade net profit. This number is also very important and you should keep an eye on it. For further information I highly recommend my free ebook “How to read a performance report”. We will get access, if you subscribe my newsletter.

Improvements and changes

At the moment you have a good basis to go on with some improvement to the strategy. For example, you can add a simple stop loss to lower the average losing trade. Therefore you can use the built in strategies, which are provided by Tradestation. Additional you can add a trailing stop to protect your open profit. This feature is also provided by Tradestation as many more.

Maybe, that you say, oh no, I don’t want to trade until end of day. I want to exit at 12 o’clock, because then everybody goes to lunch and the price reverses again. Now you can test this assumption very fast and easy. The only thing you have to do, is to modify the exit time from 1600 to 1200. Tradestation will provide you with the new results. It is this easy.
The performance report will tell you, that you are correct 51% of time now.

Now comes the next idea – from you!

I hope that I could offer you an idea of strategy development and I would be glad to hear your thoughts.

If you want to take the shortcut, you can go the easy way and check my trading recommendation. Here you find a trading strategy ready to go.

To check whether my trading recommendation is a reliable trading strategy or not, please subscribe also to my newsletter to get the ebook “How to read a performance report“.


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