Random entry systems

meanreversion

Senior member
3,398 535
That's the route I want to go down at some point. The advantage of pure rules trading is that the size should matter less, i.e. a discretionary trader will act differently if you double his capital, a systematic trader won't.

What I find amusing about rules trading is that even if the rules SEEM simple, the market always throws you curveballs which test your belief or approach. E.g. the trend filter has been falling hard and LOOKS like it's about to go negative (even though it's still tiny positive) and they you get a buy signal. Buy or not buy? Hahaha

Something else which is simple - making a cup of tea. But milk first? Tea first? How long to let the bag brew etc.

Nothing is TRULY simple if you start to dissect it piece by piece.
 

BSD

Veteren member
3,819 984
Some info here:

http://www.trade2win.com/boards/general-trading-chat/81514-setting-up-incubator-fund-uk.html#post1085600

Re track record, amazingly Larry Hite only had his back and forward whatever tests when he got MAN to come onboard.

But for a discretionary trader, I dunno, whatever your investors deem statistically relevant I guess.

That said if one wanted to start a hedge fund I'd say a mix of systems and discretionary trading would be best.

That's what I'd want to go for just to balance things out a bit.
 

meanreversion

Senior member
3,398 535
I've done a bit more digging and it seems like there are plenty of firms providing services for start up or incubator funds (we are a nation of service providers, after all). There are also hedge fund hotels which can assist with this. However, that's not the nature of this thread so maybe save it for somewhere else..
 

BSD

Veteren member
3,819 984
Just remembered this from New Market Wizard Tom Basso:

"TRYING TO BEAT RANDOM ENTRY

I was doing a seminar with Tom Basso (see his sections in Chapters 3 and 5) in 1991. Tom was explaining that the most important part of his system was his exits and his position-sizing algorithms. As a result, one member of the audience remarked, “From what you are saying it sounds like you could make money consistently with a random entry as long as you have good exits and size your positions intelligently.”

Tom responded that he probably could. He promptly returned to his office and tested his own system of exits and posltlon sizing with a “coin flip”-type entry. In other words, his system simulated trading four different markets and he was always in the market, either long or short, based upon a random signal. As soon as he got an exit signal, he’d reenter the market again based upon the random signal. Tom’s results showed that he made money consistently, even using $100 per contract for slippage and commissions.

We subsequently duplicated those results with more markets. I published them in one of my newsletters and gave several talks on them. Our system was very simple. We determined the volatility of the market by a lo-day exponential moving average of the average true range. Our initial stop was three times that volatility reading. Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close. However, the stop could only move in our favor. Thus, the stop moved closer whenever the markets moved in our favor or whenever volatility shrank. We also used a 1 percent risk model for our position-sizing system, as described in Chapter 12.

That’s it! That’s all there was to the system-a random entry, plus a trailing stop that was three times the volatility, plus a 1 percent risk algorithm to size positions. We ran it on 10 markets. And it was always in each market, either long or short, depending upon a coin flip. It’s a good illustration of how simplicity works in system development.

Whenever you run a random entry system, you get different results. This system made money on 80 percent of the runs when it only traded one contract per futures market. It made money 100 percent of the time when a simple 1 percent risk money management system was added. That’s pretty impressive. The system had a reliability level of 38 percent, which is about average for a trend-following system."

http://books.google.de/books?id=_YMfMnsqYscC&pg=PA253&lpg=PA253&dq=tom+basso+random+entry&source=bl&ots=oOByGZktMD&sig=fWpSzcXR1dRgdKSysdJcCsyiePI&hl=de&ei=CZWnS4OCFpyf_AajlOH-Ag&sa=X&oi=book_result&ct=result&resnum=1&ved=0CAkQ6AEwAA#v=onepage&q=tom basso random entry&f=false

Point for me from all of this is that apparently random entries can be profitable already, so improve on that by entering on pullbacks in trend direction with tight stops and taking what the market is giving on profitable trades and you're set.
 

meanreversion

Senior member
3,398 535
Goodness, I've read that piece a year ago and had forgotten it. But I've just managed to verify it.

Random entry can be profitable, i.e. exits are at least if not MORE important than entry. Position size and exits are thus significantly more important than entry alone, but 95 pct of advice is dedicated to the entry, that's fairly amazing when you think about it.
 
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meanreversion

Senior member
3,398 535
Perhaps therein lies the answer to 'why do most traders lose money'.. because their focus is skewed too much towards entry, and not nearly enough on exits and sizing. If a random entry system with well defined exits makes money, an averagely defined entry system with random exits won't??
 
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Tuffty

Well-known member
442 8
meanreversion,
Going back to your first post to test the 'edge' of a system I have used random trades. I've done this by taking the time profile of system generated trades and thrown these randomly at the market traded.(eg Long 3hrs, short 1hrs etc) without allowing overlaps in trades. Do this lots of times for the set of random trades and note the result each time. You then compare the system return v lots of randomly generated returns thus seeing where it lies. I use this as a confidence factor ie the system return may be in the top 80% of random returns. If this is consistent over time then an 'edge' may exist. Hope this makes sense. This could also be used to cut off a system when the 'edge' falls below a certain level but while it still makes money,
 

trendie

Legendary member
6,407 1,066
That Tom Basso point was interesting. I re-read that section from my copy of that Van Tharp book.

You would think that if position-sizing and ATR-based trailing stops could be used to generate a no-fail system, why doesnt someone do a study to prove it.
Or, take a bog-standard rule-set, get the results, then re-run with the test with the presumed account saviour position-sizing rules.

EDIT: the other thing that I noted from that chapter was the statement that any stock-trading system that bought stock that exceeded the yearly high, and sold the yearly low, beat any buy-and-hold by a comfortable margin.
 
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meanreversion

Senior member
3,398 535
Here's an interesting link - http://www.automated-trading-system.com/turtles-just-lucky/

It suggests that the 'Turtle' system would have generated 0 pct returns between 1996 to 2009, despite having posted some astonishing returns prior to that. I was always a little suspicious of the numbers being bandied around, but if you look back there were some amazing uni-directional explosive moves they were able to ride. So in other words, the comment about buying the yearly high/selling the yearly low MAY have made money in the past, but it might not be true now (I haven't done any backtesting on stocks).

You'll notice that the "random" systems are only partly random (just the entry) whilst the exits are anything but, and all share one common feature, trend following. My next line of exploration is to test random exits, either simple time based exits (which Curtis Faith claims work well in his book) or pure random exits.

I watched CNBC last night and there was a panel of experts and gurus talking about which stock to buy or sell (buy Citi / short Goldman I think was the conclusion). And here is the problem.. all the advice is what to buy, what to short. There is never any advice on position sizing or exits, as that's a little boring. So as a result, people focus almost exclusively on entries and are clueless once in the position.
 

nine

Senior member
2,038 506
Matching entries and exits is IMHO rather important.

I am currently exploiting entries designed to give a low risk entry rather than a random entry into a move. You reduce your win rate a little but the initial risk/loss for that entry is perhaps a 1/4 of the standard approach to getting a similar position in the trend.
 

Adamus

Experienced member
1,898 97
This thread makes me think it's definitely better to build a trading system starting with the exit method first and then adding on an entry strategy afterwards.

I spent quite a long time doing it the other way around - trying different filters and entry triggers combined with a simple exit on close. Didn't get anywhere with it.
 

meanreversion

Senior member
3,398 535
I think that first and foremost you need to trade your beliefs (I nicked that straight from Van Tharp). But he is right .. rather than chucking darts blindfolded at a board trying to nail a profitable strategy, start off with a premise - what do you think drives markets? What are the repeatable patterns from which you can make money? What time frame? You're more likely to win if you trade a system you believe in, and that suits you, rather than one which has simply been constructed because it looks profitable.

To that end, I don't think it helps to start from the exits and work backwards. The so-called "random system" is not really random at all.. it has a trend filter for entry, followed with very specific and detailed position sizing and exit algorithms.

It's really the conclusions here which are more relevant, namely that entries are not nearly as important as people generally think, and that sizing and exits are more important than believed.

The other purpose of the random system is to prove that the traded system is better than chance; I'm not sure I can recommend putting real money into it.

The final conclusion would be that you need to run winners and cut losses. Although this type of strategy should make money, it will result in a diminished win:loss ratio (trend systems usually have fewer than 30 pct winners). This goes directly against human nature to want to be right, which partly explains the difficulty in consistent and profitable trading.
 
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