Table of Contents
Profitable day trading is not a myth; it is achievable for everyone by following one simple outline. Traders are responsible for profits and minimizing drawdowns. To achieve more consistent profitable day trading, first, we need to determine what timeframe we wish to trade:
- In developing an algorithmic trading system, we have to determine which timeframe we want to be consistently profitable over.
- The most important metric in determining consistent profitability is the expected profit factor.
1. Profitable Day Trading Over X Timeframe
We could be a day trader who holds no trades overnight, or you could hold trades for a week, a month, or even a year. Some traders may only make 10 trades per year, while others might have thousands of trades. Every individual must decide the timeframe they wish to achieve more consistency over.
In developing our system, we have determined which timeframe we want to achieve more consistent profitable day trading over. Now, to achieve this goal, we need a level of confidence or expectation of consistent profitability. You must determine what confidence level you expect to be profitable on a monthly basis. At Quant Savvy, we prefer to have a 95% confidence level that we expect to be profitable at the end of the month. Therefore, at most, we will expect only a few losing months over 7-plus years of trading (see our Trading Bot for performance).
Expectancy is not the critical component of being consistently profitable, nor is the winning percentage of each trade. The most important metric in determining consistent profitability is the expected profit factor. The higher the profit factor for any system, the more chance of achieving consistent profitability.
- Expected profit factor = (Probability of Win * Average Win) / (Probability of Loss * Average Loss)
2. How to Achieve Profitable Day Trading
First, a trader must choose a timeframe they are comfortable with and then focus on profit factor and the number of trades. The higher the profit factor and the higher the number of trades, the higher the expectation of consistent profitability, which is the main goal of any trader.
A table displaying the relationship between trade frequency and profit factor required to be profitable within a timeframe at a confidence level of 95%:
Number of trades …………….. Profit factor required 10………………..4.00 20………………..2.50 30………………..2.00 40………………..1.75 60………………..1.50
At a 95% confidence level, if you wish to be profitable every week and your system produces a profit factor of only 1.75, then you need 40 trades out of it to achieve this goal. Therefore, for a day trading system to achieve consistent profitability, you will have to trade 40 trades per day at a 1.75 profit factor. This will be extremely difficult for a single system to have this many opportunities per day (excluding high-frequency trading) and will be rare.
- From this, you can see that it is very unrealistic to achieve profitability every single month for a single system. Most models or systems traders rarely trade over 30 times per month, and getting profit factors higher than 2.0 is extremely difficult.
- This post highlights the dangers of unrealistic expectations in day trading and emphasizes the most important metric required for a winning system (profit factor). At Quant Savvy, our Trading Bot achieves this goal at a 95% confidence level of profitability each month by combining multiple algorithmic trading systems that are completely uncorrelated (see our performance). This is the only way to produce the potential for more consistent profitability in a selected timeframe.
In our next blog post, we will outline the benefits of combining models/systems and will continue a guide to achieve more consistent profitability.
