Crossbreeding trading systems for fun and profit

How to customise your system with tried and tested ‘borrowed parts’

There’s a restaurant not far from me I’ve just never fancied visiting. It’s popular, gets good word of mouth recommendations, and even the online reviews are good. (If you can trust they are genuine!) But this place has never really appealed.

And it’s because of the type of food they serve: Italian tapas.

If I want Italian there’s a cracking little family-run restaurant I know. It’s a bit old fashioned with red-and-white checked tablecloths, giant wooden pepper grinders on the table, and dusty photos of the family’s village back in Italy on the walls – you can probably picture the kind of place. But you always get a warm welcome and the food is outstanding. It’s the experience I’ve come to expect when I think Italian food.

And if I want tapas I’m thinking the little Spanish place in town. It’s only small – just a handful of tables – but they spill a few more out onto the pavement when it’s warm (and not raining). There’s even a little deli counter where you can buy whole Iberico hams and wheels of Manchego cheese. It’s almost too stereotypically Spanish.

But Italian tapas? That just didn’t sit with me too well. It sounded a bit gimmicky. Even the venue is a bit of an oddity. It used to be a spit ‘n’ sawdust boozer, the kind of place everyone stopped talking and turned to stare as you walked through the door.

So here we have this strange fusion of cuisines in a building best remembered by the local Young Farmers Club for their raucous monthly gatherings.

Buy you know what? This restaurant is absolutely fantastic. Oh, it’s glorious.

I went for the first time in between Christmas and New Year for a friend’s birthday. I was back there on Sunday to see what the children thought (they loved it too), so it just goes to show how wrong my prejudices were!

Now before you think I’ve turned my hand to restaurant reviews, I just wanted to give you the background to a very valuable concept…

It’s effective for all kinds of business endeavours, and it’s particularly well suited for the development of new trading systems.

It’s the idea of fusing two (or more) existing approaches together to create a new third way.

Think how horticulturalists might graft two existing types of roses together to create a brand new strain that possesses particular properties. Or how the business plan for FedEx was rumoured to have been hatched by fusing together existing (but slow) airfreight shipping and the speed-efficient hub-and-spoke distribution model used by bank clearing systems.

Or even how a bold restaurateur might bring together two concepts that have existed independently for hundreds of years!

So there’s nothing revolutionary about this – it’s just smashing together two existing ideas – but when a new ‘third way’ is born it can often eclipse the sum of its parts. And sometimes in a big way too!

Now when it comes to combining trading ideas, it really can be as simple as pinching the trailing stop-loss idea from an end-of-day strategy (maybe using a measure of volatility for example) and adapting it for your intraday strategy.

Or you might take the timing of your trade entries from a scalping system you’re already familiar with and apply it to the weekly charts. This might give you low-risk entry points for position trades that can roll-on and rack up the profits for the next 4 months.

The potential for experimentation is unlimited!

And even better, if you’re anything like me you’ve probably got loads of trading systems – both fully developed and maybe a few half-baked ideas – sitting right there on your computer’s hard drive. And there’s certainly no shortage of tested systems you can download from the Internet if you haven’t.

In fact, I’ll bet you could gather together enough raw materials to start fusing and crossbreeding ideas within the next ten minutes.

Trading is a very personal endeavour. What suits one person down to the ground might torment and irritate another because it doesn’t fit their trading ‘personality’. But when you can chop bits from one system and slot them straight into another, there’s no need to reinvent the wheel. There’s no reason why you can’t build your own approach directly from the tried-and-tested parts already available to you.

Think of it like customising a car to fit your particular needs: lowering the suspension or tuning the engine. No need to completely swap the vehicle – just upgrade and change the parts that’ll give you the qualities you want.

Now it might sound a bit daunting to start chopping and changing parts of a trading system. But it shouldn’t. Not when you remember there are only really 5 ‘moving parts’ for you to consider.
So let me refresh your memory…

If you fancy trying your hand at tuning up a trading system or crossbreeding two systems together, just consider these 5 building blocks. Think which might give you the quickest upgrade in performance you need and then run some tests.

There’s nothing to break; your test results will soon tell you whether your idea is worth pursuing or if it’s time to go back to the drawing board.

Test your borrowed ideas one at a time and see what you can come up with.

5 building blocks for crossbred trading systems

1) What to trade: Think about the instrument (the markets themselves) and the vehicle you’re using (this is the way you’re accessing the market – e.g. spread betting, binary options, futures contracts etc). A new and efficient crossbred system might be created by simply applying a Forex strategy to a stock index market like the FTSE100, or by adapting a stock trading system to suit binary options trading.

2) How much to trade: This is the part of your system that tells you how much to buy and sell, or risk on each trade. If you’re looking for accelerated growth to a small account you might tweak your money management settings using the settings from more aggressive approaches. And if you’re already trading a sizeable account, you might usher-in a more conservative methodology to protect and preserve your existing trading bank.

3) When to enter a trade: This is the part of your system that gives you the green light to go – your entry signal. The world is your oyster here. No matter what your timeframe of trading, you’ll be able to borrow and test ideas from almost any other trading system. Scalpers might ethically steal a Swing trader’s approach and there’s absolutely nothing to stop a long-term position trader looking to the day trader’s toolbox for ideas. Remember how preconceived prejudices might be stopping you discovering a little gem.

4) When to exit a winning trade: Exit strategy on winning trades is probably one of most neglected areas of trading, yet one that can make a big difference to your results. This is definitely an area to spend some time on. See what new ideas you can plunder and introduce to your campaigns from other trading systems.

5) When to exit a losing trade: Don’t be afraid of the losing trade – they are an essential part of any systemised approach. Be very wary of any system that seems to shrug them aside as if they don’t matter or that they won’t happen – that’s not a good approach to model. But otherwise feel free to test and appraise any idea you come across. There are some really clever ways of applying trailing stop losses I’m currently testing myself. And you know what? I didn’t invent a single one of them!

Be Prepared: Market Moving Data Coming This Week (London Time)

Wednesday 20th January
09:30    GBP    Average Earnings Index
09:30    GBP    Claimant Count Change
13:30    USD    Building Permits
13:30    USD    CPI

Thursday 21st January
12:45    EUR    Interest Rate Decision
13:30    USD    Philly Fed
13:30    EUR    ECB Press Conference
16:00    USD    Crude Oil Inventories

Friday 22nd January
08:30    EUR    German Manufacturing PMI
09:30    GBP    Retail Sales
15:00    USD    Existing Home Sales

Monday 25th January
09:00    EUR    German IFO Business Climate

Tuesday 26th January
15:00    USD    CB Consumer Confidence

Big data coming our way on Thursday: European Interest Rate decision and then the ECB press conference 45 minutes later. It could make for turbulent whipsaw-like conditions as the market absorbs the decision and reacts to any unexpected rhetoric during the conference. Keep your eye on the clock and trade safe!

Until next time, happy trading!

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