I am often asked about day trading systems. Typically what is being referred to are day trading stock index systems (E-minis & S&Ps etc). Unfortunately, I don't have much positive to say about these types of approaches. I don't think I am being unfairly biased, I've spent over 10 years investigating all types of trading systems.

Day trading seems to satisfy the desire for action and excitement in many traders. Sometimes I think these traders are not looking to make money but rather keep a constant flow of adrenaline pumping through their body! From my perspective I cant think of even a single day trading system from five years ago that is still performing today, that's right NOT ONE! Maybe a few have had occasional "comeback" periods but I'm talking about 5 years of solid performance. In fact, a well respected trading system developer who developed some very popular short term index trading systems has reportedly told some of his customers that even he thinks they only have a 2 or 3 year shelf life at best (he's already removed one from his offering and slashed the price on another). Often times the day trading systems that still look good hypothetically are not realistically accounting for the slippage and commissions costs that eat up performance. I've seen some vendors even show performance with zero slippage factored in! When you add realistic slippage the systems go from looking great to looking bad.

It makes sense that these day trading systems could break down. The same thing that can make them look so good is the same thing that breaks them down. When your working with a single market (S&P's) or sector (Stock Indexes) it makes it VERY easy to optimize performance. You can "make" the computer show you exceptional performance just from pure curve-fitting of that past data on that one market or sector. However, when your dependant on the market characteristics of just that one market or one sector what's going to happen when that market sector changes? It reminds me of the research that showed that the drop in the S&P in 1987 should have only been a once in a several hundred year occurrence based on the current data, yet it happened within the first few years of the index being traded! Markets change constantly and you need very robust systems.

On the other side of the spectrum lets look at trend following approaches. They aren't nearly as "sexy" as day trading. You may go through extended drawdowns or flat periods before making money. However, think about this; Richard Donchain developed some simple trend following rules that were popularized back in the 1960's. Most importantly, those methods still work today, more than 30 years later!

I'm not saying I would trade those Donchain methods now. I think there are far better reward-to-risk systems and approaches available (such as ours). However, it strikes me as significant that longer term trend following methods made popular in the 60's are still working today. Yet, I cant think of a single day trading system from even 5 years ago that is still working today. Does that tell you something? I invest my own money in the markets with methods that would be considered mid to long term trend following. However, I don't invest even a single dime in day trading methods.

Now, all of that being said I do have something positive to say. My research has shown that short term (not day trading) systems can have VERY low correlation to longer term systems. This means that the right short term system could help smooth out the performance of a good longer term system. Even if that short term system is marginal on its own, it may have a synergistic effect when properly combined. However, if that low correlation was created as the result of a curve fit system that will break down in the future then you have gained nothing.

I do continue to devote a certain amount of my research time to short term systems. Maybe someday I will have something that I feel is worth releasing. Considering that there are FAR more people interested in short term index trading than almost any other type of commodity trading it would be in my best interests to have a great short term system. However, so far I just have not been able to convince myself to commit any of my own money to those methods because of the limitations I outlined above. I don't want to release something and then have to embarrassingly remove it from the market a few years later! I'm afraid I've seen others go through this already. Personally I'm sticking to what I believe has worked for a long long time, and what I believe will continue to work in the future.