Why All Mechanical Day Trading Systems Suck

It’s all in the charts. So says the day trading system you bought yesterday. And the day trading course you bought last week. And the day trading books you’ve read over the last year. If you buy the bottom of the candlestick and sell the double top while placing your stop one standard deviation from the mean and shoot for a profit of three times your risk, riches will come to you. Great prosperity awaits.

If riches do not fall into your lap, it’s because you didn’t read the charts right. That wasn’t a real double top. That was a false breakout which became a pennant which became a flag and then turned into a talking duck. Here’s a tip: Save yourself some money and don’t buy anything else which talks about technical analysis. It’s killed more traders than mortgage-backed securities.

If a mechanical day trading system ever works at all, it will eventually fail. They all do. I repeat. They all do. It’s not hard to understand why.

Neither Greenspan nor Bernanke has ever moved a market. No economic report about CPI or PPI or unemployment has never moved a market. Computers have been known to move markets but I’m pretty sure it was only when they were turned on by a person. HUMANS move markets. Humans who trade. Humans who buy and sell. Not exactly an earth shattering epiphany but you would be surprised at how many traders never seem to grasp this concept. Humans with access to large amounts of money move markets. Guys at banks and hedge funds. Traders who swing 5,000 contracts at a clip. You won’t ever move the market. Neither will I. But if you and I and a bunch of other small traders all panic at once, we might move it temporarily.

A trading chart shows you what happened in the past. It cannot tell you what’s going to happen in the future and it also cannot tell you what’s happening right now. Levels and trenlines only hold if a very large amount of money steps up to play at those spots and a chart definitely cannot tell you how much money is being put into action. This is why one should stay away from charts.

What you have to remember is…even if a technical setup works, it doesn’t work because it’s a technical setup. It works because more money went with the setup than against it. It’s all about which way the most money is going. Sharp moves are caused by new money coming into the market and scared money exiting the market at the same time. Everyone is going the same way. A trader must keep this in mind at all times.

All the professionals I know make their decisions by reading the order book which is also called “reading the tape”. They watch the bids and offers. A person who has never attempted to do this has no idea how much valuable information there is right there on a market depth trader or DOM (depth of market platform).

To consistently make money day trading, you must learn to anticipate. You have to figure out what the big traders and the big money is going to do next. You must become skilled at reading the price action. Spend more time looking at the order book and less time reading charts. Your bottom line should improve substantially as a result.

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