Ok, I found one of the books that shows that a pure random entry point can still make money if we use the right exit and stop.
Needless to say, the idea that it is possible to make money even with random buy/sell signals was a true revelation for me. From that day on I started looking for better exit points rather than fine-tuning my entry points.
The book is called Trade Your Way to Financial Freedom by the famous Van K. Tharp. Not my favorite book by all means but it still contains a few nuggets. I will quote a few paragraphs:
"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." (end of quote)
This shows that although entry is important, it is probably the least most important component of a trading system.
Needless to say, the idea that it is possible to make money even with random buy/sell signals was a true revelation for me. From that day on I started looking for better exit points rather than fine-tuning my entry points.
The book is called Trade Your Way to Financial Freedom by the famous Van K. Tharp. Not my favorite book by all means but it still contains a few nuggets. I will quote a few paragraphs:
"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." (end of quote)
This shows that although entry is important, it is probably the least most important component of a trading system.
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