What to do if ESMA killed your system

I’ve had emails from traders at their wit’s end.

The new ESMA regulations have pretty much put them out of business.

At least, as far as trading in their ‘old ways’ goes.

Personally, I don’t think ESMA is a big deal. At least not for traders following my own trading strategies: we trade in a conservative, risk-averse way, and that proven approach has remained unscathed.

But, we are not here to judge.

And any traders that *did* trade in a more aggressive way, and are now struggling to make their trades work, do deserve some help in their hour of need.

So, if EMSA put paid to your old trading system, what do you do now?

Starting from scratch?

Well a fresh strategy goes without saying, right? You’re going to have to change your approach to the markets in some way.

And you may well be getting bombarded with emails selling you the latest ‘ESMA-Proof’ systems that are hot off the press.

But who says you need to *buy* a new system?

Especially when you probably already have all the components you need. They may just need putting together in new and different ways.

There’s nothing revolutionary about this, it’s just smashing together two or more existing 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 a 4-hour 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 hourly charts. This might then give you low risk entry points for position trades that can still roll-on and rack up profits without being hobbled by higher margin requirements.

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.

And 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.

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.

Let me refresh your memory…

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, CFDs, 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 spread-bet Forex.

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. When it comes to the ESMA regulations you’d probably make a start ‘scaling-out’ your trading timeframe in order to reduce the effects of the new margins. And there’s absolutely nothing to stop a longer term position trader looking to the short-term 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!

So don’t let the new regulations mess with your head too much.

Change always comes along eventually. It’s just a fact of life! And if it feels like the end of the world it very rarely is.

So treat the ESMA situation as a challenge: If you’ve been knocked off your stride, see if you can find a new, and even better, way of trading.

But go to the information and knowledge you may already have at your fingertips first, at least before rushing headlong into buying new commercial systems.

And if you really can’t see a way to get your campaigns back on track please do drop me a line – rich@tradersnest.com.

Give me a bit of background information on where you stand and I’ll do whatever I can to help.

Happy trading,

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