Beyond Technical Analysis: How to Develop and Implement a Winning Trading System, 2nd Edition

Chapter

Developing Trading System Variations

Even change is never the same.

Introduction

This chapter explores how you can take existing ideas and then develop variations that suit your trading style. In this way, you can build a large collection of trading systems that meet different objectives. Every trader has different beliefs, time horizons, equity limitations, profit objectives, and confidence levels. Hence, few traders are executing precisely the same strategy. Thus you can trade even well-known systems without much difficulty. However, you can gain an edge by developing your variations of well-known ideas. As usual, this is not a recommendation of specific ideas for trading, but an attempt to stimulate your creativity. The focus should be on how each variation changes the structure of the trading system and its response to market data.

We first consider the 20-day or 4-week breakout system, perhaps one of the oldest mechanical trading systems in the business. We set the stage by looking at the results of a 20-bar breakout on the close using two different exit strategies. One exit strategy is a simple x-day trailing exit, but the other is a more complex volatility-based exit. The first variation is using a fixed barrier above the 20-day range. The next step, after a fixed barrier, is to consider systems with a variable or volatility-based barrier.

In an interesting twist, ...