In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade.  Here are the details of Step 10:

Define your Trading Edge

The main principle behind Day Trading, is that for a particular stock or futures contract, at certain points in time there is a greater probability that price will increase than decrease, and at other points in time there is a greater probability that price will decrease than increase.  So if at 10:32 a.m. you determine that EBAY stock has a greater probability that price will increase than decrease, you enter a Long trade.  And if at 11:47 a.m. you determine that the DOW e-mini futures contract (YM) has a greater probability that price will decrease than increase, you enter a Short trade. 

Now that you have entered  a trade, you have to make the decision when to exit the trade, either to lock in profits if the trade moves in your favor, or to minimize losses should the trade move against you.

The specific criteria that you use to make these entry and exit decisions is what I call your Trading Edge.    As a Daytrader a large part of your Edge will be a specific chart  "setup", meaning that you enter a trade when your charts match a specific criteria.   Suppose you want to trade the YM.  You could configure a one minute YM chart with a 10 period Moving Average and a 20 period Moving Average.  Your setup could be as simple as entering a Long trade when the 10 period MA crosses above the 20 period MA,  or entering a Short trade when the 10 period MA crosses below the 20 period MA.  Then you exit the trade once a profit target of 20 ticks has been reached, or a stop loss of 10 ticks has been reached, or the moving average crosses back.

OK, so here's one possible Trading Edge and setup to use.  It meets the minimum criteria of the trading edge because it specifically defines your entries and exits.  But the big question is: will this trading edge truly give you an edge?  That is, will it give you a greater than even chance of making a profit?  The only way to know is to look at historical data.  So you look at old to charts see what happened every time your setup formed in the past.   A good edge will provide either more winners than losers, or larger winners than losers, or even better both.  How many past setups do you need to look at in order to be sure that you truly have an edge?  The only answer I can come up with, is enough to convince yourself that actually have an edge (it's your money). 

As you look at each past setup that would have met your edge criteria, record in a spreadsheet what the profit or loss would have been if you traded it.  It's easiest to keep the trade size the same for each, say 100 shares (for stocks) or 2 contracts (for futures).  Figuring commissions also to make it real more realistic. After you've recorded a couple of hundred setups, if it shows a nice big profit, and you have some confidence that your edge is a good one.

There are automatic backtesting programs will allow you to automatically test your edge over a given time period, without the necessity of actually viewing the charts themselves.  Then they'll even produce a nice pretty report with all kinds of facts and figures.  Should you use an automatic backtesting program, or just manually look for setups one by one on a chart that goes back a suitable length of time? I look at it this way.  Manually combing through the charts will give you valuable screentime.  Automatic backtesting programs won't.

So let's go off on a little tangent and talk about screentime.  If you asked me to say in one sentence the most important thing a newbie can do to develop his skills as a Daytrader,  I'd say  "Get a lot of screentime".   In other words, watch the charts of whatever you plan on trading for hours and hours and hours.  And then watch some more.  Watch in real time, watch in replays, or view static charts.  Just watch. Suppose you watched the YM in real time for 500 hours.  You might start seeing patterns in its price movement, what you might call its personality.  You might begin to anticipate its moves.  Not seeing any patterns?  Not anticipating any moves?  Try watching another few hundred hours.

Obviously there are an infinite number of chart criteria you could use in defining your trading edge. Like different timeframes (one minute charts. 5 minute charts, 9 minute charts, etc).  Like different technical indicators (stochastics, moving averages, MACD, RSI, Bollinger Bands, CCI, etc).  Like the Tick and the TRIN.  Like Indexes.  So how begin decide which to use in defining your trading edge? One way is to look at what other traders have done, which I discuss below.    Play with some ideas by setting them up in your charting package, then hunker down and get that screentime with them.  What seems like it might work?

It's my contention that you must develop your own edge.  You can't simply take another trader's edge and start using it.  I could write an entire post on why this is the case, but let's stay on topic and save that for another time.  The good news is you don't have to develop your edge totally from scratch.  You can take some basic setup ideas that other traders have developed, and then modify them, combine them, mix them and match them, to make them your own.   Here are 3 links with lots of setups to get you started:
Trading Naked setups (don't worry, no porn)
Forex Strategies Revealed (written for Forex but IMHO applicable to Futures too)
Floor Trader Method (at first glance looks kinda old, but definitely worth a look)

Wanna see an edge with an entire free educational website devoted to it? it has a manual with several specific illustrated setups.  And it has a free chat room where they actually show you the trades in real time and you can ask questions.  Then check out
Woodies CCI Club.  This is an excellent place for any newbie to learn about trading, even if you have no intention of using their specific setups.

Expect that it will take a long time to develop your trading edge.  So don't become discouraged when it does.