REME Trading Method

[dwaddell]

OK,

Here's an idea thats been floating around my head for a wee while.

This is an approach I've been considering which puts all the emphasis on management and exit of a trade, REME (Random Entry Managed Exit) is the short form we'll use to refer to the method.

Basically, REME should be applicable across any market and any timeframe, its the expectations for profit targets and stops which should change depending on the market traded.

Ok, here's the science bit (not really) - entry to the chosen market is made entirely at random, I dont care how its done, flip a coin or whatever, but you make a random decision to go long or short your chosen market, pay no attention to current technicals or any indicator whatsoever.

In a normal probability distribution, this should be exactly the same as flipping a coin in that roughly 50% of the time your chosen direction will be correct.

Once we've made that decision and entered the market, the interesting part is in how to best manage the trade and the exit point to capitalise on the 50% when things go our way and minimise risk on the other 50%.

For instance, trading Cable will have differring profit/stop targets to trading euro$ or the Dow.

Exactly what these expectations are is open for discussion.

This may go no-where, but it may be interesting to develop the concept further, assessing which profit targets and stop losses should be used.

Happy trading all,

Dave.

 

[trendie]

there have been a number of threads, a while ago, regarding random entries etc.

I know Fettered Chinos had a few good ideas on this track, and posted several trades in this manner, so searching for them might help.

ATR could be used to quantify expected profits and risk, so you dont get stopped out on hard-targets.good

good luck with this, Dave.

 

[dwaddell]

Yes, I should have looked first - its always easy to think you're the first one to have ever considered an approach, which is crazy when you think about it.

I'll have a look at those previous posts.

Dave

 

[FetteredChinos]

thought i would chirp in here, as this looks like being a constructive thread..which makes a refreshing change in this place.

dwads,
if you are going down the random entry route, you are better off using a trailing stop of some description, and relying on the outlier events to drive the profits.. if you just have a profit target and a stop, then you will basically break even before costs.. ie make an overall loss.

in terms of the type of trailing stop, you can either use an ATR stop, a fixed floating stop etc, or what i use now, which is a stop placed behind the 2nd most recent swing high or low.. the reason for this being is that too many times you see a high/low violated by a couple of points before the market then reverses the other way...

just offering my experience on this matter..

and if the worst comes to the worst, it is a great way to instill trading discipline.

toodles,

fc

 

[dwaddell]

Thanks FC,

Have you done any extensive testing? And yes, thats precisley why I would favour an approach like this, it takes away the whole 'will I get in now, will I wait, what are my signals saying' element of trading and focuses on the bit that brings home the bacon, the managed exit.

The other aspect is that you ally the random entry to current price action - which removes an element of the randomness, but may lead to a higher win ratio...but saying that, that totally defeats the purpose of my original post...aaaarrgh!

At the end of the day, at any given point in time, there will be future movement north or south, thats the basis of trading, I suppose my question is how to best capitalise on that and is removing the entry criteria a valid approach, if so, I agree that a trailing stop is the best way to capture gains, but how do we measure or asses the level of pain (downside) to take in such a scenario?

Dave

 

[FetteredChinos]

Thanks FC,

Have you done any extensive testing? And yes, thats precisley why I would favour an approach like this, it takes away the whole 'will I get in now, will I wait, what are my signals saying' element of trading and focuses on the bit that brings home the bacon, the managed exit.

The other aspect is that you ally the random entry to current price action - which removes an element of the randomness, but may lead to a higher win ratio...but saying that, that totally defeats the purpose of my original post...aaaarrgh!

At the end of the day, at any given point in time, there will be future movement north or south, thats the basis of trading, I suppose my question is how to best capitalise on that and is removing the entry criteria a valid approach, if so, I agree that a trailing stop is the best way to capture gains, but how do we measure or asses the level of pain (downside) to take in such a scenario?

Dave

yes i did do some testing, both manually, and also on the limited intraday data i had.. confirmed my suspicions. just using a fixed trailing stop is profitable, but only marginally so after trading costs. still, if you wanted a basic system to automate and you didnt mind some sharpish drawdowns, then its as good, and simple as you can get.

if you however use a more dynamic exit, ie lowest low for 20 bars or whatever, you can improve things still further, but they tend to get a bit more complicated to monitor...

however, after literally years of developing mech strats, the best ones i have seen ignore charts completely, and use fundamental and seasonal factors. most people know that most tech patterns have only about a 50% chance of calling direction correctly.. no edge there. so why use the charts to trade.. external factors drive the markets, ie the ones the huge funds use... if its good enough for them.....

fc

 

[Pat494]

I think the entry criteria are one of the most important factors in the punter's favour to make a profit.
But lets go with the random entry theory for sake of this problem. Although i haven't done any back-testing a possibly profitable scenario is that it is quite rare for the index ( Dow ) to just drop ( rise ) like a stone. It usually has sniff at least in the opposite direction. Perhaps one could make money by just going for a few points - maybe only 5. So one tosses the coin, puts the up/down bet on with a limit of 5 points. Perhaps someone could test the theory and let us know ?

 

[FetteredChinos]

I think the entry criteria are one of the most important factors in the punter's favour to make a profit.
But lets go with the random entry theory for sake of this problem. Although i haven't done any back-testing a possibly profitable scenario is that it is quite rare for the index ( Dow ) to just drop ( rise ) like a stone. It usually has sniff at least in the opposite direction. Perhaps one could make money by just going for a few points - maybe only 5. So one tosses the coin, puts the up/down bet on with a limit of 5 points. Perhaps someone could test the theory and let us know ?

already have done using futures data on the Dow..

from what i recall. at the close put up 2 orders either side of the closing price.. sell +5 and buy -5.. makes a profit overall, but barely, and you would have to be trading with 1pt spreads..

in contrast, if you set the orders to buy +40 or so, and sell -40 or so, you have a profitable breakout strat, but be wary of the equity flatlines.

 

[Pat494]

already have done using futures data on the Dow..

from what i recall. at the close put up 2 orders either side of the closing price.. sell +5 and buy -5.. makes a profit overall, but barely, and you would have to be trading with 1pt spreads..

in contrast, if you set the orders to buy +40 or so, and sell -40 or so, you have a profitable breakout strat, but be wary of the equity flatlines.

Thanks FC.
Good to see you around still
If you are testing data - how about limit at half the stop value eg limit 10 points and stop 20 or vice versa on 50/50 basis would this make money ?
I would have tested it myself, but with Yahoo data its not possible. In fact I have just tried to find somewhere on the yahoo site to tell them so - but although they say they welcome suggestions I couldn't find an address to do so !!

 

[FetteredChinos]

Thanks FC.
Good to see you around still
If you are testing data - how about limit at half the stop value eg limit 10 points and stop 20 or vice versa on 50/50 basis would this make money ?
I would have tested it myself, but with Yahoo data its not possible. In fact I have just tried to find somewhere on the yahoo site to tell them so - but although they say they welcome suggestions I couldn't find an address to do so !!

still around, but posting infrequently, for assorted reasons..

anyway, what i was getting at in my above post was that if the market moves less than say 10 point from the previous close it is likely to wobble around that level and hit approx 10 points the other side.. any more than that, and it tends to continue in the same direction for the rest of the day.

i havent had a look at this for a while, as its very very tough to construct a robust intraday system that can beat the spreabetting spreads. as a result i have moved longer term.. indeed have been long on the Dow since 29th September last year, and doing very nicely thankyou

but getting back to the original purpose of this thread, it is to state that it is possible to snaffle some points with a random entry, however, to do so, you need the big statistical outliers to happen in your favour. and they tend to occur over several days, rather than intraday.. as a result, limiting random entry to day-trading is making an already thin system even thinner.

hope this helps,

fc

 

[damianoakley]

OK,

Here's an idea thats been floating around my head for a wee while.

This is an approach I've been considering which puts all the emphasis on management and exit of a trade, REME (Random Entry Managed Exit) is the short form we'll use to refer to the method.

Basically, REME should be applicable across any market and any timeframe, its the expectations for profit targets and stops which should change depending on the market traded.

Ok, here's the science bit (not really) - entry to the chosen market is made entirely at random, I dont care how its done, flip a coin or whatever, but you make a random decision to go long or short your chosen market, pay no attention to current technicals or any indicator whatsoever.

In a normal probability distribution, this should be exactly the same as flipping a coin in that roughly 50% of the time your chosen direction will be correct.

Once we've made that decision and entered the market, the interesting part is in how to best manage the trade and the exit point to capitalise on the 50% when things go our way and minimise risk on the other 50%.

For instance, trading Cable will have differring profit/stop targets to trading euro$ or the Dow.

Exactly what these expectations are is open for discussion.

This may go no-where, but it may be interesting to develop the concept further, assessing which profit targets and stop losses should be used.

Happy trading all,

Dave.

Hi Dave,

I've been one of the people involved in a Random Entry thread in the past.

You can make money with a random entry, a 3 x ATR trailing stop, and a 1% equity position sizing method - it has been proven and I've actually tried it myself as an experiment.

Most people don't believe it, but it is possible !


Thanks

Damian

 

[rogerha]

Hi Dave,

I've been one of the people involved in a Random Entry thread in the past.

You can make money with a random entry, a 3 x ATR trailing stop, and a 1% equity position sizing method - it has been proven and I've actually tried it myself as an experiment.

Most people don't believe it, but it is possible !


Thanks

Damian

That sounds interesting Damian. Did you try it for long ? It fits in with the well known point that entry conditions only play a small part in the success of trading, and that money/trade/risk/exit management are actually the key to success.

Success in Random Entry reinforces that, and your statement above reinforces that further. Presumably if you gain a level of success in managing a random entry method your trading should only improve from there.

This is a good thread.

 

[damianoakley]

Hi rogerha,

I didn't try it for long - about 200 trades - just long enough to confirm a reasonable validity.

The strike rate was about 35% and the account increased by 42%.

These results compare similarly to the average trend-following system.


Thanks

Damian

 

[smccreedy]

Hi sorry to but in but can I clear a couple of points up.

When you talk of a trailing 3atr do you mean say you buy the FTSE at 6330 and atr is 50 points the stop is 150 below the entry. As the market moves up so does your stop but it will never move down locking in an ever decreasing loss / increasing gain.

If this is the case do you calulate atr at the end of each day and change your stop accordingly or when you enter does ATR stay fixed for the duration of the trade.

When you talk of random do you mean pick a market then toss a coin to go long or short immediately or would you say only go long and pick the market randomly?

I know this defeats the point of randomness but I'd guess a simple filter could improve things a lot, ie if market is above 200 lag you only go long.

Maybe have five markets all above the lag and pick one at random to enter on the long side.

find five below the lag and pick one at random to enter on the short side?

I like the idea of this, being on the golf course and saying, if I hit the green I'm going long if I go in the bunker I'm going short (maybe that's biased to the down side!)

Or if my girlfriend puts on white underwear I'm short, black and I'm long.

I imagine a world of smiling to myself before making phone calls and people thinking I'm mad.

Fun and profitable sounds good to me.

Stephen McCreedy

 

[damianoakley]

Hi creedy,

Just to clarify the point that you ask for - in my tests it is only the ENTRY that is random. Everything else, the market, the exits, the position sizing, is all fixed.


Hope that clarifies your query,


Thanks

Damian

 

[rtsaur]

Just to clarify the point that you ask for - in my tests it is only the ENTRY that is random. Everything else, the market, the exits, the position sizing, is all fixed.

Damian

Hi Damian,

Can you please make it clearer of your definition of the Random Entry. For example, what are you going to do if the stop-loss (3xATR trailing stop) of one of your longs has just been triggered. Thanks.

Ray

 

[damianoakley]

The entry, long or short, is determined at random by a coin-flip.

The market is then entered at 1% position size with a 3xATR trailing stop.

If the stop is hit, then the market is re-entered long or short as determined by another coin-flip.


Hope that clarifies,

Thanks

Damian