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Absolute Simplest KISS Method. Also, how do we measure risk reward?

  • #21
  • Nov 3, 2006 7:05pm Nov 3, 2006 7:05pm
Just as a side discussion I've been thinking about the "no matter ea" some more.

In discussing the extremes of trading, in this thread it's about tackling extremely small profits with high success rates, a lot of truths of trading begin to reveal themselves. In this instance, unless a different stop loss strategy or 100% succes is achieved, the truth revealing itself is that it doesn't matter how many times you win if you lose end up losing more. Duh right?

There's two ways of looking at it though. The first lesson is to not put too much into any one single play. The other is to make sure you have a system that can severely outweigh the losses. Those are both lessons we hear all the time. Why am I bothering to post this then?

I'm posting because of the idea the "no matter ea" presents. Would a random entry into a certain chart give us a 50/50 chance at success? That's all we really need right? Even 30% success can be successful if the losses dont outweigh the wins.

So how successful is random? Stop losses seem to play a huge part in a systems success, both in preventing it and insuring it. Do we just need to find a correct pip target and stop loss? Would a 40 TP with a 20 SL inherently just produce a successful EA? If not, why? Because the stops outweigh the TP instances.

People are constantly coming out with systems that try to make the system more accurateby looking at indicators, S/R, waves, etc.. Has anyone ever tried making a system where it is randomly entered and the only variables to change the success of the system are the stop loss and take profit values?

How often does a system with 40 TP and 20 SL achieve success? Does a trailing stop really protect profits or limit them in something like this where it could go to 38, retrace 15, then run again? Does a system that enters 3 positions with exit strategies at different pip levels really increase pip profits?

How much does something as simple as having RSI values designate what position is opened on the random entry? Using the indicator as a decision to which side to take rather than when to open the trade. I've mentioned that before. But if that gives us 50/50 success rates with a certain SL and TP combination would it not be successful in the long run? Really need to get going on those EA skills. Matt
  • #22
  • Nov 3, 2006 7:14pm Nov 3, 2006 7:14pm
Quoting permanentjaun
...Has anyone ever tried making a system where it is randomly entered and the only variables to change the success of the system are the stop loss and take profit values?...
Maybe I don't understand you correctly, but are you saying to create a system that randomly enters a trade, and depends on an optimal SL and TP to be successful? If you are, you are wasting your time. The whole concept in trading is to achieve a high probability of success by determining an optimal entry point, and later an optimal exit point. If you have a crappy entry, there is no exit on earth that will make your system profitable. You can, however, define a high probability entry point, then optimize your TP and SL values (assuming a fixed target exit system) to achieve a descent system. Afterall, you only need a descent system combined with money management to have a very profitable system. TradeStation can define an optimal SL and TP given a set of entries.
  • #23
  • Nov 3, 2006 7:33pm Nov 3, 2006 7:33pm
Quoting twinchell
If you have a crappy entry, there is no exit on earth that will make your system profitable.
That's kind of my point. It's only a crappy entry because you were on the wrong side of the trade. What if a random trade put you on the right side of the trade when most were on the crappy side? How many times would random put you on the right side of a crappy trade? Ha. Matt
  • #24
  • Nov 3, 2006 7:37pm Nov 3, 2006 7:37pm
Quoting permanentjaun
How many times would random put you on the right side of a crappy trade?
Matt, I think that doesn't make sense. If you're on the right side of a trade, it isn't a crappy trade.
  • #25
  • Nov 3, 2006 7:50pm Nov 3, 2006 7:50pm
just trying to understand. you enter any position, taking 10 pip profit.

but what do you do if it goes against you? when do you pull the trigger to stop the bleeding? what if it keeps on going?
  • #26
  • Nov 4, 2006 1:21am Nov 4, 2006 1:21am
Quoting twinchell
Matt, I think that doesn't make sense. If you're on the right side of a trade, it isn't a crappy trade.
Exactly my point. If we randomly enter long or short at random times, how many times would we be on the right side of the trade? We're not concerned with "A" crappy entry. We're concerned with how many times out of our total trades we are placed in crappy entries. If we are placed into crappy entries just as many times as good entries then we can make a profit simply by letting the good entries make more pips than we lose on the crappy entries. For example, having a 40 TP and 20 SL.

Simple math. Out of 100 trades that we were placed into good entries 50% of the time and crappy ones 50% of the time then our profit would be 1000 pips if we hit our TP every time on the good entries and SL every time on the crappy entries.

That simple math and reasoning has been around and discussed already on many forums. What I am asking now is then how much does all of our research and chart reading go into the success of our systems if simple exit strategies can produce results? I'll make it clear. What if we're successful in our strategy only 1% of the time, but that one time we're successful the play banks 1000 pips. The other 99% of the time it hits a stop loss of 10 pips. Out of 100 trades that would be a system producing 10 pip profits.

The question I'll repeat then is, how much does all of our chart reading help us if we don't have preset TP and SL? Perhaps a mediocre trading strategy could be made successful by simple yet effective exit strategies.

Right now I'm wondering how effective an EA could be made to place random entries. I still think the success of the EA is the ability of the EA to have an educated guess in terms of whether it should enter long or short. I'll be bold and say an MA based EA system would work here if using HMA's. The EA wouldn't place trades on certain events like crosses, but just use the MA's to decide long or short based on the position of 2 MA's relative to one another. Just an idea to play around with.

Another idea would be using 5 indicators that we could determine if they were giving bullish or bearish signals. If the majority show bullish then enter long, if bearish enter short. All it'd need would be majority vote.

All of this could still be used in the original idea of the thread; random positions at the opening of a new daily or weekly candle. Only now, it would be based around the idea that at the open of a new candle a price has the most potential volitility to move away from that point. It's the only point on a candle that doesn't move. Once the candle it is opened it has set the point. Highs, lows, and closes can all shift over time. Matt
  • #27
  • Nov 4, 2006 1:22am Nov 4, 2006 1:22am
Quoting clam61
just trying to understand. you enter any position, taking 10 pip profit.

but what do you do if it goes against you? when do you pull the trigger to stop the bleeding? what if it keeps on going?
]


Thats one of the faults of the system. I'm trying to figure that out by either making the system more accurate, or through more effective exit strategies. Matt
  • #28
  • Nov 4, 2006 4:50am Nov 4, 2006 4:50am
  •  iya
  • | Joined Oct 2006 | Status: always protect yourself | 129 Posts
Quoting permanentjaun
]
Thats one of the faults of the system. I'm trying to figure that out by either making the system more accurate, or through more effective exit strategies. Matt
Yeah, I think even the simplest system needs a little strategy. Or as Einstein said, everything should be made as simple as possible, but no simpler. So here's my opinion on some of the mentioned points... mostly based on logic, but I'm not a pro so take it with a grain of salt.

 

  1. Entries are equally as important as exits. In a good system, both will try to give you an edge. Even the exit of loosing trades can be optimized, so when backtesting it's not unwise to disable a 'hard' SL to see how the exit strategy works.
  2. You cannot trade market noise i.e., scalping without any edge. The "no matter ea" with 40 TP and 20 SL will have twice as many loosers as winners.
  3. The "simple math" is neglecting spreads, which gets fatal with small TP.
  4. If you don't use SL you will get a margin call rather sooner than later.
  5. Candles are just interpretations of price action. There is nothing special about the open of a new candle and price will as likely move away in either direction as anytime else. There's different volatility over a day, but you can't directly 'trade volatility' but only direction.

  • #29
  • Nov 4, 2006 5:39am Nov 4, 2006 5:39am
It seems to me you're trying to optimise randomness.
  • #30
  • Nov 4, 2006 8:43am Nov 4, 2006 8:43am
Quoting faure
It seems to me you're trying to optimise randomness.
Which is a waste of time to me. There are systems on this forum that are on the right side of trades less than 50% of the time with a win/loss ratio of 1 (Meaning the wins are the same amount as the losers). I doubt you'll get a better entry with randomization.
  • #31
  • Nov 4, 2006 11:25am Nov 4, 2006 11:25am
Quoting permanentjaun
...Also wondering how time affects these trades...
Greetings, i've been reading with interest as i've also been following Orange's model and been trading box-trade setups for some time. I would like to ad that the swap could really impact the trades negatively also if not closed out before 17:00 EST when interest is calculated, although swap can also ad to your position as we know. Just have to be aware of which way will give and which way will take away from the account balance before entry.

Quote
I will look into that system shortly. Although from your description I am cautious if it is based on the highs and lows of the candle. Highs and lows have a higher chance of being around support/resistance than normal I believe. Entering a trade using those numbers could leave you with a trade that immediately bounces in the wrong direction. I'll read up on it though.
If you happen to have a copy of Tom DeMark's book on TA he discusses what he calls the "Magnetic Price" which he sees (after years of study/trades) as a recent significant "Close" rather than "High". He suggests drawing S/R to these MPs and look for profit taking at these areas rather than the highs.

Quote
The first lesson is to not put too much into any one single play.
True, though i imagine the only way an account of any reasonable start-size of say 10K could "grow" at an acceptable rate is risking a minimum of 5% or so each entry. What if those 15.6 bad trades were in a row? ...and nearly wipe out the account...?

Just thinking as i type.
Cheers,
Thom
  • #32
  • Nov 4, 2006 6:45pm Nov 4, 2006 6:45pm
Quoting twinchell
Which is a waste of time to me. There are systems on this forum that are on the right side of trades less than 50% of the time with a win/loss ratio of 1 (Meaning the wins are the same amount as the losers). I doubt you'll get a better entry with randomization.
Not sure I understand what you mean. If the system is on the right side of trades less than 50% of the time then how can the win/loss ratio be 1? Did you mean the profits from wins = losses from bad trades?
  • #33
  • Nov 4, 2006 7:07pm Nov 4, 2006 7:07pm
Quoting permanentjaun
Not sure I understand what you mean. If the system is on the right side of trades less than 50% of the time then how can the win/loss ratio be 1? Did you mean the profits from wins = losses from bad trades?
% profitablilty is the percentage of winning trades. If you're "right" 50% of the time, you have a % profitable of 50%. The win/loss ratio is the average winning trade over average losing trade. So, if your TP is 50 and your SL is also 50, your win/loss ratio is 1. Sorry if I confused you.
  • #34
  • Nov 4, 2006 7:16pm Nov 4, 2006 7:16pm
My stepson elected to adopt a variation on this strategy. Has been working for him well up until a week ago. He's at a floating loss of 200 pips right now and waiting for the pair to correct itself.

Not a pleasant place to be.

AFF
FOREX = 21st century alchemy.
  • #35
  • Nov 4, 2006 11:19pm Nov 4, 2006 11:19pm
Quoting afemi94ce
My stepson elected to adopt a variation on this strategy. Has been working for him well up until a week ago. He's at a floating loss of 200 pips right now and waiting for the pair to correct itself.

Not a pleasant place to be.

AFF
I'd also like to know what the variation of the strategy is.

I've been thinking a little and may think D3vil's strategy of waiting for the currency to swing so many pips a certain way before entering a position in that direction may prove more effective then a random entry. Something I should look into is if there is a common tipping point on a candle such that if a price moves X amount of pips in one directions it is likely to continue going for X amount of pips. His idea of 50 pips may be useful, but not optimal. This strategy could also be much easier to develop a stop loss strategy for.

My thinking is that my original strategy for this thread required candles with long shadows. This strategy would capitalize on currencies that typically have short shadows. Would the success be based on the shadow length from the open? For example if the average shadow length on a candle for a currency from open is 30 pips, then would placing a buy/sell order at 31 pips from the open put us on the right side of the trade just more than 50% of the time? Get what I'm saying? Then the success only depends on our SL and TP goals. Matt
  • #36
  • Nov 5, 2006 7:25pm Nov 5, 2006 7:25pm
I don't have a chart of his curent situation and I don;t know which pair or pairs he's trading.

Here's what he does: He wakes up at 3:00 AM and enters in the direction of the trend for a net gain of 5 pips and goes back to bed. He wakes up at 7 and does the same thing.

10 pips a day doesn't sound like much but he's playing a large number of lots, and when it works, it works for him. But I have to tell you, he lost 6K 8 weeks ago and had made most of it back, until his current situation has him at a 7K floating loss right now.

At least he's not panicking, but he's not sleeping well and he's like a bear with a sore a$$. As a long term strategy I wonder how well this is going to work for him, financially, emotionally and physically.

If "get rich while sleeping" sounds too good to be true, maybe it is.

Cheers
AFF
FOREX = 21st century alchemy.
  • #37
  • Dec 11, 2006 7:37am Dec 11, 2006 7:37am
In this thread traders have suggested to go for a TP of 5 pips without any SL. Why don't you turn it around? SL always 5 pips and no TP at all. Combine this with a full hedge. Enter negative correlated EURUSD and USDCHF at the same time both with 5 pips SLs and no TPs. In the worst case scenario you just loose 10 pips combined. In the best case scenario the sky is the limit with a few hundred pips gain ... think about it ...
  • #38
  • Dec 11, 2006 8:46am Dec 11, 2006 8:46am
Quoting Geldschlucker
In this thread traders have suggested to go for a TP of 5 pips without any SL. Why don't you turn it around? SL always 5 pips and no TP at all. Combine this with a full hedge. Enter negative correlated EURUSD and USDCHF at the same time both with 5 pips SLs and no TPs. In the worst case scenario you just loose 10 pips combined. In the best case scenario the sky is the limit with a few hundred pips gain ... think about it ...
So you're going to enter a trade with a spread of 3 and a stop of 5. So you have 2 pips movement? Are you trying to fail?
  • #39
  • Edited 10:15am Dec 11, 2006 9:11am | Edited 10:15am
Quoting twinchell
So you're going to enter a trade with a spread of 3 and a stop of 5. So you have 2 pips movement?
A 8 pips movement.
  • #40
  • Dec 11, 2006 10:37am Dec 11, 2006 10:37am
Quoting Geldschlucker
A 8 pips movement.
Please explain how you have 8 pips of movement when your stop is 5 pips and 3 of that 5 is spread.
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