Why Do Most Day Trading Systems Fail?

As you’ve probably seen before, most traders, and most trading systems ultimately fail. Obviously the mental side of trading and the ability to control one’s emotions is a critical factor.

But beyond the mental side, why do most trading systems fail? The main reason is that nearly all day trading systems are built to perform well in only certain market conditions or “auction phases” as we call them. For example, if you have a trend or momentum based system, it’s going to be your personal ATM machine when the market is trending or breaking out. However, you’re going to get killed in consolidating and reversing markets.

Conversely, if you have a counter-trend based system you’ll do great when the trend ends, but you’re going to take a lot of losses when the market just keeps going.

Before getting into the key differences between the eMiniDayTrader method and most other trading systems, let’s first discuss the various phases the market goes through:

Understanding Auction Phases (market cycles)

The market, on any timeframe, has repeatable phases.

Horizontal

This is a phase of consolidation or balance in the market. Market participants have essentially agreed on fair value and the market oscillates between the extremes of this consolidation.

Vertical

This is a phase of directional action or imbalance in the market. Something has changed and market participants can no longer agree on fair value. Either buyers become more aggressive than sellers and rally the market higher or sellers become more aggressive than buyers and break the market lower.

End-Of-Vertical

This is a phase of exhaustion in the market. When a market rallies it eventually runs out of buyers and has to reverse and auction lower in search of more trade. Conversely, when a market sells off it eventually runs out of sellers and has to reverse and auction higher in search of more trade.

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Here is a theoretical sketch of this process:

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Here is an example from a market profile type chart:

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How is the eMiniDayTrader Method Different?

Most systems just have entry techniques. If the entry technique you’re using happens to match up with the current auction phase, you look like a genius. If not…uh-oh. The EMDT Method is different. With the help of our unique software we FIRST determine the auction phases. Then, we utilize the proper setup to take advantage of that particular auction phase. We’re not claiming that this is the holy grail, but this subtle difference substantially increases your edge on each trade.

Vertical Condition (market trending or breaking out)
When the market is in the Vertical condition, the strategy is to “go with” the market. We want to take initiative action. These are momentum and trend based trade setups. We want to buy high and sell higher or sell low and buy lower. We have 6 specific trade setups that take advantage of this market phases.

End-of-Vertical Condition
When the market is in the End-Of-Vertical condition, the strategy is to catch tops and bottoms. These are reversal and counter-trend type trade setups. We have 6 specific trade setups that take advantage of this market phases.

Horizontal Condition (market consolidation)
When the market is in the Horizontal condition, the strategy is to “fade” the market. We want to take responsive action by selling rallies and buying sell-offs at the edges of consolidation zones. We have 4 specific trade setups that take advantage of this market condition

For more updates from Dave, visit the eMiniDayTrader blog at eMiniDayTrader.com