Day Trading Systems Day trading systems need to make decisions fast, and they need to have a framework for doing so. That’s why they rely on research. But what kind? Most trading systems rely heavily on technical research, which is an analysis of trading charts formed by price patterns to measure the relative supply and demand for the security. But some use fundamental analysis to help inform their decisions, too. Research systems fall into two categories: fundamental and technical: Fundamental research looks at the specific factors that affect a security’s value. What’s the relationship between the trade deficit and futures on two-year treasury notes? What’s the prediction for summer rainfall in Iowa, and how will that affect December corn futures? How dependent is a company on new products to generate earnings growth?
Technical research looks at the supply and demand for the security itself. Are people buying more and more shares? Is the price going up a lot as they buy more, or does the price go up just a little bit? Does it seem like everyone who is likely to buy has already bought, and what does that mean for the future price? Day trading systems do very little fundamental research. Sure, they know that demand for ethanol affects corn prices, but they really want to know what the price will do right now relative to where the price was a few minutes ago. How a proposed farm bill might affect ethanol prices
in six years doesn’t figure into the day trade. Knowing a little bit about the fundamentals – http://www.learndaytradingsystems.com.au/daytrading.html those basic facts that affect the supply and demand for a security in all markets – can help the day trading systems respond better to news events. It can also give you a better feel for when swing trading systems (holding a position for several days) will generate a better profit than closing out every night. But knowing a lot can drag a trading down. Fundamental analysis can actually hurt you in day trading systems, because you may start making decisions for the wrong reasons. If you know too much about the fundamentals, you may start considering long-term outlooks instead of short-term activity. For example, many people buy Standard & Poor’s (S&P) 500 Index mutual funds for their retirement accounts because they believe that in the long run, the market will go up. That does not mean that people should trade E-mini S&P futures or an S&P exchange-traded fund today, because a lot of zigzagging can happen between now and the arrival of the long-run price appreciation.
Fundamental research falls into two main categories: top-down and bottom-up. Top-down starts with broad economic considerations and then looks at how those will affect a specific security. Bottom-up looks at specific securities and then determines whether those are good buys or sells right now. With a top-down approach, the day trading looks at the big economic factors: interest rates, exchange rates, government policies, and the like. How will these things affect a particular sector or security? Is this a good time to buy stocks or short interest rate futures? The top-down
approach can help evaluate the prices in big market sectors, and it can also help determine what factors are affecting trading in a subsector. You don’t have to trade stock market index futures to know that the outlook for the overall stock market will have an effect on the trading of any specific company’s stock. Bottom-up analysis looks at the specific performance of the asset. It looks at the company’s prospects and then works backward to figure out how it will get there. What has to happen for a company’s stock price to go up 20 percent? What earnings does it have to report, what types of buyers have to materialize, and what else has to happen in the economy? If you love the very idea of fundamental research, then day trading systems are probably not for you. Its require quick responses to price changes, not a careful understanding of accounting methods and business trends. A little fundamental analysis (http://www.learndaytradingsystems.com.au) can be helpful in intraday trading systems, but a lot can slow you down.