Random entry proves strength of money management. | Forex Factory

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Random entry proves strength of money management.

  • #1
  • First Post: Feb 5, 2007 9:58am Feb 5, 2007 9:58am
"Tom Basso designed a simple, random-entry trading system … 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% risk model for our position-sizing system. …

We ran it on 10 markets. And it was always, in each market, either long or short depending upon a coin flip. … It made money 100% of the time when a simple 1% risk money management system was added. … The system had a (trade success) reliability of 38%, which is about average for a trend-following system."


Source: Van K. Tharp, Trade Your Way to Financial Freedom



I thought this was interesting. It emphasizes how strong money management is the key to a successful trading system.
  • #2
  • Feb 5, 2007 10:23am Feb 5, 2007 10:23am
What's the 'system' u meant above? Money management issue really make a big impact in trading forex? Mind sharing how u do ur own money management in trading?
  • #3
  • Feb 5, 2007 10:32am Feb 5, 2007 10:32am
Quoting jancyryu
What's the 'system' u meant above? Money management issue really make a big impact in trading forex? Mind sharing how u do ur own money management in trading?
I personally use fixed fractional position sizing and have found it to make the most sense but I recommend backtesting your system to find the one that is the most profitable for your style of trading.

http://www.adaptrade.com/Articles/article-ffps.htm
  • #4
  • Feb 5, 2007 10:51pm Feb 5, 2007 10:51pm
Ya that is interesting.
How you act is more important than how you feel.
  • #5
  • Feb 6, 2007 5:16am Feb 6, 2007 5:16am
Quoting jancyryu
What's the 'system' u meant above? Money management issue really make a big impact in trading forex? Mind sharing how u do ur own money management in trading?
If I understand it correctly:
Calculate an average volatility by taking the 10 day exponential moving average of the ATR.
Flip a coin and decide to buy/sell depending on the outcome of the coin.
Take as a trailing stopploss 3 times the average volatility. Change the stoploss each day at the close, because the average volatility changes evey day.

I don't know which market he means.
  • #6
  • Feb 6, 2007 6:16am Feb 6, 2007 6:16am
Quoting hidethereal
"Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close."

Source: Van K. Tharp, Trade Your Way to Financial Freedom
This sentence is not clear to me. (the "trailed from the close" part)
Anyone has an idea?

  • #7
  • Feb 6, 2007 7:11am Feb 6, 2007 7:11am
I remember reading this in Dr Tharp’s book.

Chuck Le Beau tells a similar anecdote about a guy who based his entries from signals given by an antenna in a Coke bottle, but apparently traded profitably because his exit method was sound.

Interviewed in Jack Schwager in New Market Wizards (Harper Business, 1992), Tom Basso “.....as a stock account manager, he has averaged 16% annually since 1980, approximately 5% above the average S&P return….. as a futures fund manager, Basso has averaged 20% annually since 1987 with only moderate volatility”.

In theory, random entries will be profitable if (1) the market trends far enough, often enough, and (2) one uses a trend-following system that cuts losses quickly, and let profits ride, exploiting the long trends that occur.

The 1% risk doesn’t alter system expectancy; it simply allows the trader to survive a prolonged losing streak, while the market is ranging, and s/he waits for the next significant trend to occur. Low win rate (30%-40%) is a typical symptom of many trend following systems.

David
  • #8
  • Feb 6, 2007 7:28am Feb 6, 2007 7:28am
Quoting hidethereal
It made money 100% of the time when a simple 1% risk money management system was added. … The system had a (trade success) reliability of 38%, which is about average for a trend-following system.

I don't understand what the statement "it made money 100% of the time" means


Regards,
In trading you are only as smart as your dumbest mistake. - Ralph Vince
  • #9
  • Feb 6, 2007 7:57am Feb 6, 2007 7:57am
I noticed that %R recalculated after every trade was killing me due to the asymetrical leverage factor. I now trade a fixed $ per pip value until my account doubles, then I double my position size until it happens again. Combined with a 2% of initial balance risk per trade and a crazy high winrate, a losing month is rare.

Asymetrical leverage kills! Don't be a statistic.
  • #10
  • Feb 6, 2007 8:04am Feb 6, 2007 8:04am
Quoting Darkstar
I noticed that %R recalculated after every trade was killing me due to the asymetrical leverage factor. I now trade a fixed $ per pip value until my account doubles, then I double my position size until it happens again. Combined with a 2% of initial balance risk per trade and a crazy high winrate, a losing month is rare.

Asymetrical leverage kills! Don't be a statistic.
I know several people who trade the way you do, it really comes down to your system and how the position sizing affects it. Have you used the adaptrade software? It gives you the opportunity to adjust your system to several built in position sizing methods. Pretty interesting when you start playing around with it.
  • #11
  • Feb 6, 2007 8:04am Feb 6, 2007 8:04am
Quoting doblece
This sentence is not clear to me. (the "trailed from the close" part)
Anyone has an idea?

I assume that at each close of the day he adapted the stoploss to the new volatility value. Some kind of trailing stop.
  • #12
  • Feb 6, 2007 8:06am Feb 6, 2007 8:06am
Quoting JosTheelen
If I understand it correctly:
Calculate an average volatility by taking the 10 day exponential moving average of the ATR.
Flip a coin and decide to buy/sell depending on the outcome of the coin.
Take as a trailing stopploss 3 times the average volatility. Change the stoploss each day at the close, because the average volatility changes evey day.

I don't know which market he means.
The purpose of the post was not to give out a system.
  • #13
  • Feb 6, 2007 11:41am Feb 6, 2007 11:41am
Quoting Darkstar
I noticed that %R recalculated after every trade was killing me due to the asymetrical leverage factor. I now trade a fixed $ per pip value until my account doubles, then I double my position size until it happens again. Combined with a 2% of initial balance risk per trade and a crazy high winrate, a losing month is rare.

Asymetrical leverage kills! Don't be a statistic.
I'm not completely clear on what you mean by asymetrical leverage. Regarding a set % of account risk on a trade-by-trade basis, I can see how this would be a bad idea if the R/R was less than 1:1. (which certainly doesn't mean a system is "bad"... it might win 99% of the time) That would mean that statistically your losses would always be the most expensive pip for pip...

But what if R/R is more like 2:1, but your win % is below 50%? Why is it still dangerous? What am I missing?
  • #14
  • Feb 6, 2007 1:44pm Feb 6, 2007 1:44pm
Quoting sm31
I'm not completely clear on what you mean by asymetrical leverage. Regarding a set % of account risk on a trade-by-trade basis, I can see how this would be a bad idea if the R/R was less than 1:1. (which certainly doesn't mean a system is "bad"... it might win 99% of the time) That would mean that statistically your losses would always be the most expensive pip for pip...

But what if R/R is more like 2:1, but your win % is below 50%? Why is it still dangerous? What am I missing?
Even a great system is going to suffer strings of losses. One that generates a 2:1 r/r is going to generate many strings of losses. After 10 consecutive 2% losses, your down 18.29%%, but you need 22.38% just to get back to breakeven. So you would need 6 consecutive 2:1 wins to make up for 10 losses.

Without recalculating after each trade, you would only need 5 consecutive 2:1 wins to breakeven. I'm not saying it's a huge difference, but 1 extra win is 1 extra win. That 1 win could be the difference in a 1:1 51% system making money or breaking even.
  • #15
  • Feb 6, 2007 3:35pm Feb 6, 2007 3:35pm
Everybody has there limit in the amount of drawdown they can take before it becomes a problem for them psychologically. If I know that taking a 25% drawdown will bring me twice the amount of return, then I am willing to accept that and not let it affect my trading.

It comes down to your personal risk tolerance. Some people don't want to go under 10% and fixed fractional position sizing won't accomodate that with their trading style. It just happens to work great for the way I trade.
  • #16
  • Feb 7, 2007 4:17am Feb 7, 2007 4:17am
Hi,
Quoting Darkstar
Even a great system is going to suffer strings of losses. One that generates a 2:1 r/r is going to generate many strings of losses. After 10 consecutive 2% losses, your down 18.29%%, but you need 22.38% just to get back to breakeven. So you would need 6 consecutive 2:1 wins to make up for 10 losses.

Without recalculating after each trade, you would only need 5 consecutive 2:1 wins to breakeven. I'm not saying it's a huge difference, but 1 extra win is 1 extra win. That 1 win could be the difference in a 1:1 51% system making money or breaking even.
This is only true if the system has a fixed stoploss and profit for 2:1.

If a system has an average of 2:1 then in theory, some of the wins will be bigger than 2:1 and it could take less than 6 consecutive wins to make up 10 losses. Risking 2%, I've seen systems make up 20%DD with 2 wins, thus enabling the system keep within it's average RR.

But you've got to know your system to let this work

Best regards
Alan
  • #17
  • May 19, 2020 3:55am May 19, 2020 3:55am
Quoting doblece
{quote} This sentence is not clear to me. (the "trailed from the close" part) Anyone has an idea?
todays close price + or - the ATR, depending on where is it u r heading, and that is your new stop loss.
Steps to profitability: Collect data, money management, stay bored
  • #18
  • May 19, 2020 3:58am May 19, 2020 3:58am
Quoting SliverB
{quote} I don't understand what the statement "it made money 100% of the time" means Regards,
he meant that the system doesn't lose money relative to u're initial account balance.
Steps to profitability: Collect data, money management, stay bored
  • #19
  • Last Post: Nov 8, 2023 1:05pm Nov 8, 2023 1:05pm
i really like this system.
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