#061: WHAT CAN SWITCHING SYSTEMS BRING YOU?
Every year I spend some time travelling around to personally inspiring places to gain some distance from my trading so I can come up with new ideas and thoughts that can be as “out-of-the-box” as possible.
In this respect, Singapore has had an especially strong impact on me. It is where I always come up with dozens of new ideas. Today I will share an interesting idea that crossed my mind in this inspiring country.
A couple of years ago, I created my first breakout system that in principle works on 27 markets, while in Singapore. But that isn’t the core of today’s article. It is about a different idea. Broadly speaking, it started when I tried to create a system for Japanese NIKKEI to be able to start to slowly diversify outside of the US and Europe.
During my travelling I have spent a lot of time on system development for Nikkei and I have to say I wasn’t very successful at the beginning. First of all, it was necessary to switch from intraday to swing systems as intraday systems generated average profits that were too small – the results were rather poor after taking into account commission and slippage.
Later on I found out that swing systems were even worse! Whatever I did, the equity of my candidates looked mostly like this:
Therefore, I was constantly trying to come up with new ideas to improve my results. Similar situations “hyped me up” to engage the creative part of my brain to the maximum. And even though such a creation of new ideas is painful every now and then, it is usually worth it.
The problem of all my Nikkei systems was that the equity looked more or less the same even after regular reoptimization. And that was the case of all 10 of the systems I have created as a trial.
Eventually I came up with The Idea: What if I directly switched from system to system instead of carrying out the regular annual reoptimization of parameters (which is an integral part of my successful workflow of development of breakout strategies)? In other words: I would take all 10 systems which I have created for Nikkei (even though all equities look like the one above) and I would create criterion according to which I would switch from system to system at regular intervals. It is almost like a regular annual reoptimization of the system but in this case it is a merge of 10 systems into one and switching from one entry rule to another on annual basis. To fine-tune this idea to its real form took some time, but the result literally took my breath away. During the first test the whole idea showed this result:
This was an enormous improvement and further tests started to show that this idea is quite beneficial. Although it does have a few practical pitfalls, for example one of them is to create robust rules for system selection – what system to use in what period (for obvious reasons I won’t share this rule with you). Generally speaking, each new idea is always linked to a number of practical aspects that need to be resolved. By the way, this is an ability that later on separates successful from unsuccessful.
This interesting “discovery” in Singapore brought something else as well – it strengthened my conviction that in today’s dynamic markets it is absolutely necessary to come up with solutions that constantly adapt to market changes. In other words, while I hesitated to regularly reoptimize last year as I was asking myself if it was really the best thing I could do in my method and workflow trading, today I am firmly convinced. Immediately after my return I made an immense number of other confirmatory tests and some were really shocking (for example the discovery that the use of 3D optimization charts for optimization is a fast way to hell). In my opinion, regular reoptimization is often necessary in many intraday discretionary strategies when the trader needs to be able to react to constantly changing volatility and, according to that, adjust, for example, the size of stop-loss, profit targets, etc. In this case it isn’t such a mechanically-specified area, but each discretionary trader knows what hard times a change in volatility can give you. And a trader should always have a plan to adapt to such changes. From my point of view, such a step is already reoptimization.
Of course, the technique of switching from system to system is a pretty advanced issue. I personally also work on different variations. Besides, even this isn’t the Holy Grail; it is only one idea from many, and one application from many for my ATS breakout portfolio. Yet, for me it is a very promising path that is worth to further discover. The tests presented in this article speak for themselves.