Random Entry

[damianoakley]

Hi everyone,

After spending some time reading these boards, it seems to me that most people are concentrating on the wrong aspect of trading.

Everyone seems to want to concentrate on entry signals that are as high a percentage accuracy as possible. It's been proved that in the long-term, you can make money in the markets thru random entry - ie - entering the market long or short determined by the flip of a coin.

I think we should all think about that. All of the indicators and Technical Analysis that we use barely perform any better than random entry. If you think about it, that makes some sense. Once you enter the market, it can do 1 of 2 things - go up or go down - that's a 50% chance of your trade going the right way - no better than random.

Money management is the key - and yet most systems are based all around entry signals.

I would welcome anyone's comments on this.

 

[Trader333]

Whilst I agree that money management is the key to successful trading, I would also say that random entry is not a good strategy. If for example you enter a market that is experiencing a momentum move upwards by shorting it then you will in all probability suffer a large loss. If you enter a market that has paused then you have a better chance of your random entry being successful and that is where a good money management strategy would prove successful in my view.


Paul

 

[Finlayson]

I agree in a fashion with the point u r making as I do believe the markets r random to a point, & trade management & risk :reward etc r the most important aspects in trading.

however I also believe markets behave in a 'herd mentality' type of way & understanding this I can look for the markets 'reactions' & certain events to increase my odds & trade 'comfort level'.

knowing this I could not take a 'random entry' as it would contradict my current beliefs, & if taking an entry with my current strategy increases my odds & doesn't increase the effort........then I would be daft not to.

but as I said ''I agree in a way'' that u could be successful with 'almost' random entries & the right method.......I say almost because I think if u r watching a chart u couldn't help but use some common sense so wouldn't be completely random

 

[madasafish]

Absolute b#ll#..... - add your own letters

Anyone who does not see trends in tick charts, 1 min, 2.3.4 etc to daily and yearly is blind.

Random entry works IF you get the direction right and IF you don't buy at a recent high or sell at a low and IF you can afford the drawdowns.

The rest of us try to time trend entries...

 

[alanb41252]

I performed an experiment this week. I have a new FinSpreads account so I can trade as low as 1p per point for the first 8 weeks.

I made a large number of trades using " random entry" at very low stakes and let the trades run.

Most of them were big losers and if I multiply the loss by 500 ( as if I was betting 5 quid a point ) then the result is frightening.

It has taught me one thing. Do not use random entry as a trading "system".

I agree with you Paul

 

[Grey1]

load of russbish...

The most important aspect of trading is risk analysis and the risk of each trades starts with pin point sharp entry than fantastic exit..

I fully understand the importance of at least 2:1 exit but with a poor entry the out come of nearly all random based systems is negative ROA...

Think of what you might lose first if you are a pro..

 

[Finlayson]

alanb

I agree, random entry is not wise

but shouldn't the losers have been 'small' losers & the winners 'big' winners....surely this would have an affect on the results.

this is all I did when I started ( most of my trades were guesses really), but because I had my risk:reward right I was still successful

jason

 

[Trader333]

I think the point is being missed here somewhat. I am not arguing that TA is of no use but I do believe that with sound money management a profit can be made without the use of TA.

If you have an edge of only 5%, ie you get 55% of trades correct and 45% wrong and then use sound money management you really should be very profitable in the long term.

What many have said is that, even with TA, they are still only getting 50% of trades right and then someone said well you may as well use random entry then etc

I have read, and cannot remember where, that a good trader can take almost indicator and make a profit using it and that it is the use of money management that allows this and I would tend to agree with this view.

Now this brings me to the point of what is sound money management because most people I speak to think it is just about placing a stoploss. Whilst this may be important it is only a small part of managing a trade. When you get into it there is a lot more to it than that and it soon becomes easy to see how a good profit can be made using money management with less of an emphasis on TA.

I know others will disagree and that is fine which is what makes the boards a good place to discuss these issues.

Cheers


Paul

 

[madasafish]

stop loss>?

B#ll##//.... again.

What you need to make money consistently is
either 100% wins..
or
profits > losses.


I.e run your winners.

ie. trail your stops...

I know: my indicators are set to desensitise : ie. filter out signals...

 

[neil]

It's out there

The answer may be in Uranus ( A thread on this board I hasten to add)

 

[Grey1]

If you take profit as much as you risk . i.e Reward/Risk= 1 then one needs more than a 50 % win rate to beat the market..

However if you took twice as much i.e. Reward/Risk =2 then you can have a less than 50/50 trading system and still win ...

( see the attachment for a simulation of a 40% system)..

Re :--stop loss

As paul said stop loss is only small part of money management.. In fact a correct stop loss is a secondary issue in risk management..

Correct money management starts with calculating the risk of the trade as follow

1) What is the probability of winning the trade ? MOST IMPORTANT

e.g If market is Oscillating do I go long near the High or low/ This is the probability of win .. (Some institutions use VWAP in their calculations to asses the probability of win )
Programme traders use statisitcs to calculate the probability of win in each trade..


2) How much should I risk ?

This is your stop loss ..


3) How much should I start, add or reduce position as trade goes on ..

4) What is the minimum Exit target to justify the Risk ( never engage in a trade if the the potential reward is less than 2.. Some gurus mention this value to be at least 3 but let them show us mortals how they see 3 times into the future.. )

As you can see there is a lot more in money management than stop loss

PS:--There are other aspects to risk management specially the portfolio and diversification risk ...

 

[Finlayson]

reading this thread it seems trade/money management, risk:reward & a good understanding of your trading instrument are all important. suppose simply put the more the odds r in your favour ......the better off u r.

but whatever technique somebody is using, no matter how 'off the wall' it appears, or how much it goes against our own theories, if it is successful for them (if they r being honest of course!).... then it is successful.

damianoakley : if u have found a way for random entry to work for u & put money in the bank then keep using it, as this is the important part.

it seems there are many different ways to trade profitably, I think the thing is to find the one that works for u & stick to it.

Jason

 

[bisto]

hi all,

i read on another thread about chinese numbers which i think is a con. however does anyone think the money management part is any good - capital x 5% divided by stop = £ per point ? if this was combined with a good entry & exit strategy would it do the biz?

bisto

 

[alanb41252]

5% is way too high. I have looked at their site and they are talking about 20 point stops, a bank of GBP 5,000, a 5% risk factor and a stake size therefore of GBP 12.50.

GBP 50,000 in your bank at a more conservative 1% factor and stops at 50 points only gives you a stake size of GBP 10 per point.

I don't know if Chinese Numbers is a con but their money management suggestions suck. I guess they set their levels so high because they reckon they have such a high success rate.

Not sure I believe it - no harm in trying the free monthly trial though. Think I'll give it a whirl - but with different money management parameters.

 

[JonnyT]

If you are trading vast amounts of capital then risking 1% per trade is a good way to preserve the capital.

If you only have a few grand then 5% risk per trade in the knowledge that you have a slight chance of risking ruin may be a viable option. Of course reduce the risk as capital grows.

JonnyT

 

[Trader333]

My risk per trade is never more than 0.3% of my capital or $3 risked per $1000 of capital and usually considerably less than that.

Paul

 

[peedee]

B***** h***l Paul, that is very cautious indeed. Depending on what you trade you must have some wedge behind you. Peedee.

 

[Finlayson]

all seems like good advice, though I think some of it is down to your own personal comfort level of risk & trade strategy.

I know somebody who began trading just before me , using same methods & similar net +points, yet while I stayed on 1£point to learn, I made about£1000 in 3months, He applied a simple rule of upping his stake every time he had made enough to take a 40 point loss on the next stake.................he made a substantial amount of money in similar time frame..........he obviously convinced himself he wouldn't lose more than 40 points. Dont think I could do this, but I admire his attitude.

I am not saying this is the way to do it, dont know what he is doing now or how much he started with ( also believe the SB company applied some restrictions).

just raising something that I find interesting & seems to be a lot of varying views about, think because of the different ways people trade

Jason

 

[damianoakley]

Hello all,

It seems that my comment on random entry got a lot of replies in a short space of time - I've only just got back to my computer and read them all!

First of all, let me make one thing clear - I DO NOT USE RANDOM ENTRY! I just find it interesting that you can make money in the markets using the flip of a coin. I was just interested in people's opinions.

For the people above who are instantly dismissing and laughing at the thought of random entry, I think you should know that random entry has actually been proven to be profitable.

A trading coach in the U.S. (A guy called Van Tharp) ran a test to experiment with random entry. He would firstly flip a coin to decide whether to enter the market long or short. He would then enter the market risking 1% of his available capital and using a trailing stop of 3 times the 10-day Average True Range.

And that was it - that was his system. When is current trade exited, he would flip the coin again and re-enter long or short.

The system had a strike rate of about 38% winning trades and showed a profit after every single test.

This proves that position sizing and exits are the key to successful trading, not entry signals.

I would welcome everyone's comments.

 

[Henry]

Reminds me of the "Something very simplistic" system that was discussed at length on Elite. The guy used an indicator on his chart more or less in place of a coin flip to determine direction long or short. His trade management was a bit back to front though, with his targets being smaller than his stops and therefore requireing a higher than 50% hit rate.

I know the link's been posted before, but it seems revelent to the topic, so here it is again

http://www.elitetrader.com/vb/showthread.php?threadid=8734&perpage=6&pagenumber=1

The Van Tharp thing is interesting, I wonder what time period he tested over?

H.