Random entry systems

[meanreversion]

I've done a bit more digging and it seems like there are plenty of firms providing services for start up or incubator funds (we are a nation of service providers, after all). There are also hedge fund hotels which can assist with this. However, that's not the nature of this thread so maybe save it for somewhere else..

 

[BSD]

Just remembered this from New Market Wizard Tom Basso:

"TRYING TO BEAT RANDOM ENTRY

I was doing a seminar with Tom Basso (see his sections in Chapters 3 and 5) in 1991. Tom was explaining that the most important part of his system was his exits and his position-sizing algorithms. As a result, one member of the audience remarked, “From what you are saying it sounds like you could make money consistently with a random entry as long as you have good exits and size your positions intelligently.”

Tom responded that he probably could. He promptly returned to his office and tested his own system of exits and posltlon sizing with a “coin flip”-type entry. In other words, his system simulated trading four different markets and he was always in the market, either long or short, based upon a random signal. As soon as he got an exit signal, he’d reenter the market again based upon the random signal. Tom’s results showed that he made money consistently, even using $100 per contract for slippage and commissions.

We subsequently duplicated those results with more markets. I published them in one of my newsletters and gave several talks on them. Our system was very simple. We determined the volatility of the market by a lo-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 system, as described in Chapter 12.

That’s it! That’s all there was to the system-a random entry, plus a trailing stop that was three times the volatility, plus 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 percent of the time when a simple 1 percent risk money management system was added. That’s pretty impressive. The system had a reliability level of 38 percent, which is about average for a trend-following system."

http://books.google.de/books?id=_YM...AA#v=onepage&q=tom basso random entry&f=false

Point for me from all of this is that apparently random entries can be profitable already, so improve on that by entering on pullbacks in trend direction with tight stops and taking what the market is giving on profitable trades and you're set.

 

[meanreversion]

Goodness, I've read that piece a year ago and had forgotten it. But I've just managed to verify it.

Random entry can be profitable, i.e. exits are at least if not MORE important than entry. Position size and exits are thus significantly more important than entry alone, but 95 pct of advice is dedicated to the entry, that's fairly amazing when you think about it.

 

[meanreversion]

Perhaps therein lies the answer to 'why do most traders lose money'.. because their focus is skewed too much towards entry, and not nearly enough on exits and sizing. If a random entry system with well defined exits makes money, an averagely defined entry system with random exits won't??

 

[Tuffty]

meanreversion,
Going back to your first post to test the 'edge' of a system I have used random trades. I've done this by taking the time profile of system generated trades and thrown these randomly at the market traded.(eg Long 3hrs, short 1hrs etc) without allowing overlaps in trades. Do this lots of times for the set of random trades and note the result each time. You then compare the system return v lots of randomly generated returns thus seeing where it lies. I use this as a confidence factor ie the system return may be in the top 80% of random returns. If this is consistent over time then an 'edge' may exist. Hope this makes sense. This could also be used to cut off a system when the 'edge' falls below a certain level but while it still makes money,

 

[trendie]

That Tom Basso point was interesting. I re-read that section from my copy of that Van Tharp book.

You would think that if position-sizing and ATR-based trailing stops could be used to generate a no-fail system, why doesnt someone do a study to prove it.
Or, take a bog-standard rule-set, get the results, then re-run with the test with the presumed account saviour position-sizing rules.

EDIT: the other thing that I noted from that chapter was the statement that any stock-trading system that bought stock that exceeded the yearly high, and sold the yearly low, beat any buy-and-hold by a comfortable margin.

 

[meanreversion]

Here's an interesting link - http://www.automated-trading-system.com/turtles-just-lucky/

It suggests that the 'Turtle' system would have generated 0 pct returns between 1996 to 2009, despite having posted some astonishing returns prior to that. I was always a little suspicious of the numbers being bandied around, but if you look back there were some amazing uni-directional explosive moves they were able to ride. So in other words, the comment about buying the yearly high/selling the yearly low MAY have made money in the past, but it might not be true now (I haven't done any backtesting on stocks).

You'll notice that the "random" systems are only partly random (just the entry) whilst the exits are anything but, and all share one common feature, trend following. My next line of exploration is to test random exits, either simple time based exits (which Curtis Faith claims work well in his book) or pure random exits.

I watched CNBC last night and there was a panel of experts and gurus talking about which stock to buy or sell (buy Citi / short Goldman I think was the conclusion). And here is the problem.. all the advice is what to buy, what to short. There is never any advice on position sizing or exits, as that's a little boring. So as a result, people focus almost exclusively on entries and are clueless once in the position.

 

[nine]

Matching entries and exits is IMHO rather important.

I am currently exploiting entries designed to give a low risk entry rather than a random entry into a move. You reduce your win rate a little but the initial risk/loss for that entry is perhaps a 1/4 of the standard approach to getting a similar position in the trend.

 

[Adamus]

This thread makes me think it's definitely better to build a trading system starting with the exit method first and then adding on an entry strategy afterwards.

I spent quite a long time doing it the other way around - trying different filters and entry triggers combined with a simple exit on close. Didn't get anywhere with it.

 

[meanreversion]

I think that first and foremost you need to trade your beliefs (I nicked that straight from Van Tharp). But he is right .. rather than chucking darts blindfolded at a board trying to nail a profitable strategy, start off with a premise - what do you think drives markets? What are the repeatable patterns from which you can make money? What time frame? You're more likely to win if you trade a system you believe in, and that suits you, rather than one which has simply been constructed because it looks profitable.

To that end, I don't think it helps to start from the exits and work backwards. The so-called "random system" is not really random at all.. it has a trend filter for entry, followed with very specific and detailed position sizing and exit algorithms.

It's really the conclusions here which are more relevant, namely that entries are not nearly as important as people generally think, and that sizing and exits are more important than believed.

The other purpose of the random system is to prove that the traded system is better than chance; I'm not sure I can recommend putting real money into it.

The final conclusion would be that you need to run winners and cut losses. Although this type of strategy should make money, it will result in a diminished win:loss ratio (trend systems usually have fewer than 30 pct winners). This goes directly against human nature to want to be right, which partly explains the difficulty in consistent and profitable trading.

 

[cedricthefrog]

for a true random system, try radiation trading - enter and exit on the beeps from your geiger counter. :cheesy:

 

[meanreversion]

That inane comment ruins what is otherwise a worthwhile thread, thanks man.

 

[cedricthefrog]

you are welcome.

There is a serious point in there though (somewhere). Random entry systems are only good for measuring the quality of your money management system and exit criteria. Now which of the three is most important is debateable but i'd take a system with good* MM, entries and exits over a random entry system any day.

* 'good' is used as an objective term subject to the usual statistical tests

 

[SvenFoster]

In the case of random entry systems you may want to consider the following..

Write a system that only trades in a single direction and let that direction be decided via a parameter long/short....
Can you make it profitable using everything else at your disposal, exits, position size etc...
You could use a random entry if you want or a simple signal, no matter.
It gave me a different take on the entry when I did it...

Entries are of course important as are exits. Systems are complex and each part affects the other.

Its my opinion, that you need a directional bias or belief of where the market is going. The entry determines your risk. If your entry sucks then that has a knock on affect to your stops. Your exit and directional bias will determe profit or loss. the Entry will play a part in that equation as to how much bang per pip you'll get.

Something else you can try for a laugh...
If I gave you a system with very simply entry criteria(lets say, C > previous C) and the following scope for change...
1) You can choose to ignore the signal.
2) you can change the position size/own stops/targets.

How may different systems could be made. I'm sure someone would make money but it just highlights the complexity of systems.

 

[FXTrend240]

To be honest all people need to do is :

identify an entry methodology within a trend (with trend or countertrend)
apply your personal money/risk management techniques
backtest too, make sure it has a positive expectancy

that's all, in fact i've been reading through a skype conversation i had about 8 months ago with a really good trader and he was telling me this semi-mechnical system and i just ignored it, didn't really listen, he then says if people just obeyed setups, detaching ego and 'money' they'd be a lot richer, and that this little method , he believes, could comnfortably make someone 1 mil.

whether it can or can't isn't the point, i've come to think that treating each setup as an 'investment' helps to make it feel more like a business. for example i'm allocating 60% of my capital to discretionary trend trading eurusd and ftse100 with a money management method i made up which i think is going to help me a lot , the other 40% is using the semi-mechanical system.

Another thing, people should stop flaming indicators, the reason why people think they suck was because that when they used them they were looking for the holy grail. Im pretty certain indicators, even retail, can be used effectively.

 

[meanreversion]

There's another thread out there on discretionary vs automated trading.. somewhere along the way it disappeared up its own backside, but for a while there was some decent debate on the matter.

 

[nunrgguy]

My take is almost the same.
Run winners - how? Trail stop
Cut losers - how? Trail stop

Entry based on n criteria (are they random?...possibly)
Initial stop based on n criteria
Trade managed on smaller time periods than set up
Trade goes positive 5 pips or more after n amount of time (this depends on typical volatility on the time frame you manage on), move stop to break even, if more than 5 pips, b/e/ +1 etc
Trade in the red after n amount of time, trail stop to lower side of time period bar (i.e. approx swing low on smaller timeframe), trade then either subsequently stopped out or more opportunities arise to reduce loss with further trailing, or trade moves into the black.
Trade in the black: trail stop based on n time period

i.e. Trailing is discrete, not pip by pip.

So that's it. Cut losers, never take a full loss unless you get whipped and run winners. Trend is your friend...maybe, it is when you catch one, whether what you see visually on a chart is a trend or your mind playing tricks is something else. But I agree, trade your beliefs - if you believe trend exists, trade it, it will keep you from overtrading if nothing else.

Money mgmt. Very generally as I use a few more discretionary elements, initially 2% risk per trade. Keeping at that monetary value until account doubled then double monetary amount back so at 2% risk, during drawdown keeping amount at that value also (shock horror) unless the market is flat/spiking, then either stay out or reduce position size, increasing back up when market starts to move in your favour again.

 

[oiltanker]

So ATR stops off the daily mean stops of 150pts+?

 

[meanreversion]

1 ATR in cable is close to 200 pips at the moment.

 

[Splitlink]

Thanks for the link, her conclusions are the same that I've reached. It's only recently that I've started looking at random entry and the results are not far off the proper system. Which in itself raises some questions -

1. If entry rules are not that important, why do people seem to focus on it 90 pct of the time?

2. It's possible for a random system to perform as well as fairly well regarded fund managers, except it doesn't charge fees. Are fund managers adding any alpha to their clients, or just themselves?

3. How many people trade random systems? Do the banks/hedge funds have any money allocated to this (the mind boggles -- imagine a hedgie testifying to Congress saying "Yeah, we flip a coin to choose the direction")

My conclusion at this stage is that, amongst all the hundreds of trading expressions, the two which are most pertinent are

- let your winners run, and cut your losses
- the trend is your friend [this one is quite important]

Time passes! I've just been going through back threads and seen this.

People spend all that time on entry points because they need some kind of rule to get them into a trade.

I believe in random entries but, in practice, I say to myself, "When price reaches a certain point, I'm entering".

These points are, usually, something that has worked before so I have developed a certain confidence in them.

I do agree, though. Most random points are just as good

providing

that the direction is right.

That seems so obvious to me but lots of guys will try the hard and expensive way.