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Coin-Toss Trading Strategy

  • #1
  • First Post: Edited 9:58pm Feb 7, 2008 6:12pm | Edited 9:58pm
I came across something interesting this morning on my way to school.

Apparently, there is a trader/investor out there who developed a money management system so effective that he based his entry on a coin toss. In spite of the random nature of the coin toss, the money management consistently made money.

Here is my challenge to you:

Develop a money management strategy which when applied to any reasonable trading system, can turn a profit within a year.


For some brainstorming ideas, here is what the aforementioned trader did:

Quote
We determined the volatility of the market by a 10 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.
That's it! That's all there was to the system; a random entry, plus a trailing stop that was three times the volatility, and 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% of the time when a simple 1 percent risk money management system was added.
  • #2
  • Feb 7, 2008 7:53pm Feb 7, 2008 7:53pm
Quoting Ronald Raygun
Develop a money management strategy which when applied to any trading system, can turn a profit within a year.
There doesn't exist any money management scheme that'll turn a trading system with negative expectancy into one with positive expectancy.
Domo Arigato, Mr. Roboto!
  • #3
  • Feb 7, 2008 8:31pm Feb 7, 2008 8:31pm
Quoting Ronald Raygun
I came across something interesting this morning on my way to school.

Apparently, there is a trader/investor out there who developed a money management system so effective that he based his entry on a coin toss. In spite of the random nature of the coin toss, the money management consistently made money.

Here is my challenge to you:

Develop a money management strategy which when applied to any trading system, can turn a profit within a year.


For some brainstorming ideas, here is what the aforementioned trader did:
This is a very interesting concept....thanks for sharing.

Damon
"Keep your eyes on the helpers" - Mr. Rogers
  • #4
  • Feb 7, 2008 9:58pm Feb 7, 2008 9:58pm
Quoting Mr. Roboto
There doesn't exist any money management scheme that'll turn a trading system with negative expectancy into one with positive expectancy.

You're right, allow me to amend that.

A REASONABLE trading system I think should work.
  • #5
  • Feb 7, 2008 10:05pm Feb 7, 2008 10:05pm
Sounds like Van Tharp's run. Later proven to be flawed, if I'm not mistaken.

http://www.forexfactory.com/showthread.php?t=38050

http://www.forexfactory.com/showthread.php?t=48562
  • #6
  • Feb 7, 2008 10:14pm Feb 7, 2008 10:14pm
Quoting Mr. Roboto
There doesn't exist any money management scheme that'll turn a trading system with negative expectancy into one with positive expectancy.
You're exactly right.
The idea that you can money manage a loser into a winner is one of the biggest myths in trading.
  • #7
  • Feb 7, 2008 10:17pm Feb 7, 2008 10:17pm
I saw those, and agree that in a trending market, this system would lose. My question is:

How can the MM be set so that it at least minimizes the loss if not eliminate it, while still taking in more pips in profit, and still remain a non-bias system? Is it possible? Or am I simply reaching for another non-existent holy grail?
  • #8
  • Feb 7, 2008 10:21pm Feb 7, 2008 10:21pm
why would you want a coin toss? The odds are 50/50. With good MM you are lucky to break-even if your lucky. But don't forget the spread that your paying each trade. Look for some trading systems that will give you better odds like 70/30 with good MM. Why don't you try and simple 5/8 moving ave. cross with good MM. Most EA's are good but why don't you try to improve on one with MM built into the EA. I don't don't like telling someone that they cant do something, because anything is possible, however look for better odds.
  • #9
  • Feb 7, 2008 10:25pm Feb 7, 2008 10:25pm
I have a number of systems with better odds. I coded just about all of them, and all of them are freely available on this forum.

My main problem is that I feel like I'm leaving too much on the table, and some of the early systems I coded were near breakeven as it is. A lot of the problems according to other traders was Money Management. So, how do I fix that?
  • #10
  • Feb 7, 2008 10:30pm Feb 7, 2008 10:30pm
i would find someone on here that could help you program MM into a trading system. Im sure there is someone on here that might be willing to help.
  • #11
  • Feb 7, 2008 10:33pm Feb 7, 2008 10:33pm
Programming isn't a big problem, it's coming up with a good money management system.

I'm thinking primarily of the Turtles. Their MM was more scaling in, (Pyramiding?). I figured that would be worth using somewhere.
  • #12
  • Feb 8, 2008 12:04am Feb 8, 2008 12:04am
Quoting Ronald Raygun
Programming isn't a big problem, it's coming up with a good money management system.

I'm thinking primarily of the Turtles. Their MM was more scaling in, (Pyramiding?). I figured that would be worth using somewhere.

I would try to used something that would let your risk a percent of your account. like an input for 1% to 10% with a trailing stop. Pyramiding works for stocks however i feel that pyramiding in forex is very risky.
  • #13
  • Feb 8, 2008 7:19am Feb 8, 2008 7:19am
There is an interesting point in your post one, which makes that trailing stop slightly different from trailing stops I am familiar with. The stop is recalculated/trailed when price moves in your favour (no surprise there) and if Volatility shrinks (which I have never heard of before) then the stop is also trailed.

On the subject of the coin toss, there are lots of theories on this obviously. 50/50 is your expectation of a positive outcome. Therefore 50% of the time you will pick the right direction. If your risk/reward is stacked in your favour then you should come out on top. This is why traders with only a 30-40% success rate in their trading system still make money, they may risk 1% to make 3% or 4%.

The difficulty you have with quantifying the above traders statement in post 1 is that you don't know what the R:R ratio is because it is based on a variable which is volatile in its nature. But a 50:50 expectation is more than enough to make money if the risk/reward is appropriate. Enhancing your expectation whilst maintinaing the same risk/reward will only ehance your return.

The only way you can dismiss that trading idea is to test it, and I for one wouldn't dismiss the concept.
  • #14
  • Edited 3:45pm Feb 8, 2008 3:11pm | Edited 3:45pm
My understanding of the quoted statement is that there is no TP.

I'll try and figure out how to code a random number generator, and I'll move from there. Either that, or I'll come up with a random selection of variables to use.

I'm also looking for the book it came from. If anyone knows that would be great.
  • #15
  • Feb 8, 2008 4:00pm Feb 8, 2008 4:00pm
Quoting Ronald Raygun
My understanding of the quoted statement is that there is no TP.

I'll try and figure out how to code a random number generator, and I'll move from there. Either that, or I'll come up with a random selection of variables to use.

I'm also looking for the book it came from. If anyone knows that would be great.
How about using binary equation with the Daily Oscillator System v1.4 EA? It supposedly has a 79% strike rate. Paris
  • #16
  • Feb 8, 2008 4:16pm Feb 8, 2008 4:16pm
I only know the binary equation in a Baccarat context. What are you talking about Paris?
  • #17
  • Feb 8, 2008 4:36pm Feb 8, 2008 4:36pm
Quoting Ronald Raygun
My understanding of the quoted statement is that there is no TP.

I'll try and figure out how to code a random number generator, and I'll move from there. Either that, or I'll come up with a random selection of variables to use.

I'm also looking for the book it came from. If anyone knows that would be great.
use the random number generator in MT4. You will need to seed the generator first to give a better result. Use something like local time to seed it then generate a random number.

int randomnumber;
MathSrand(TimeLocal());
randomnumber = MathRand();

Be sure to seed the generator each time before use to help generate a more random sequence of numbers.
  • #18
  • Feb 8, 2008 4:51pm Feb 8, 2008 4:51pm
Quoting Ronald Raygun
I only know the binary equation in a Baccarat context. What are you talking about Paris?
I think she's talking about this:

http://www.profitsareup.com/
  • #19
  • Feb 8, 2008 5:17pm Feb 8, 2008 5:17pm
Quoting forexmoments
I think she's talking about this:

http://www.profitsareup.com/
yes, that's exactly right. Paris
The trade method in the profits r up system has a 1:1 risk reward ratio and wins about 52% of the time.
However the daily oscillator system strategy has a 1.6:1 and wins more than 70% of the time.!!! It doesn't get much sweeter than this. Paris
  • #20
  • Feb 8, 2008 5:26pm Feb 8, 2008 5:26pm
Quoting Ronald Raygun
I only know the binary equation in a Baccarat context. What are you talking about Paris?
It's a form of martingale. It won't work.
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