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thetrendfollowe

Registered: Oct 2007
Posts: 315

12-15-09 01:28 AM

Quote from JezLiberty:

I was wondering... there must be some edge to the entry methodology as well; otherwise you might as well have random entries with trade management. There might be some market structure that cause trend continuation(?)

Actually I have run an edge calculation on a simple N-day breakout entry and it seems to offer a positive edge:
http://bit.ly/8RpMAY
meaning that even if the "hit rate" is <50% the potential gain is greater than potential loss overall

Jez.
You would be how good random entry actually is.
Run a few tests.
I would post some here but on the work computer at the moment.

Hit rate has nothing to do with size of gains or losses.
Average win size in relation to average loss size is the payoff factor.
But you already knew that.
So I must have missed your point?

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thetrendfollowe

Registered: Oct 2007
Posts: 315

12-15-09 01:34 AM

Quote from ssb11:

i would comment that i don't believe there is a more misunderstood stat than W%. it can be inversely correlated to profit. in nearly every bit of my research the quickest way to make more money is to lower your W%. any method can increase W% by increasing the width of the initial exit and by increasing the rate at which the stop follows a profitable trade or by decreasing the width of a profit objective. increasing the size of losing positions is another way to increase the W%. in fact one could make a method that had an 80-90% W% very easily.

the one suggestion that i would make to any new trader is to take whatever they are doing and try to decrease the number of winners in favor of the size of those winners.

I agree wholly.

The reason I mentioned W% is because its the only way to quantify or see if there is any edge in the entry.

Of course there doesn't have to be an edge in the entry for a method to have a positive expectancy.

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Muskoka Joe

Registered: Aug 2005
Posts: 79

12-15-09 03:57 AM

Quote from thetrendfollowe:

I agree wholly.

The reason I mentioned W% is because its the only way to quantify or see if there is any edge in the entry.

Of course there doesn't have to be an edge in the entry for a method to have a positive expectancy.

=============

I have seen that view expounded before, but never with any evidence that it is true... is there any evidence? The thought that random or worse entries can be tortured to produce winning trades is a glaring invitation to over optimization.

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thetrendfollowe

Registered: Oct 2007
Posts: 315

12-15-09 04:37 AM

Quote from Muskoka Joe:
I have seen that view expounded before, but never with any evidence that it is true... is there any evidence?

I've tested random entry myself, though it was years ago, when i was first getting started in systems design.
The results suprised me.

Do you have Amibroker?
Its pretty easy to do it with Ami I think.

I can run a test for you but will probably have to wait until the weekend, very busy this week.

Quote from Muskoka Joe:
thought that random or worse entries can be tortured to produce winning trades is a glaring invitation to over optimization.

How so?
If you run a system over the S&P500 for example, and say
RandomEntry:=0.2

Or however it was (cant remember the code) which means enter every one in five stocks alphabetically starting from the test start date and then put in your money management and your trade management (stops, exits) and then see the results.

It will suprise you.

Though it shouldn't.

The only reason trend following systems make money is the fact that they cut their losses and let their winners run. And this is all to do with stops and exits. And nothing to do with the entry.

Obviously, the situation is different with short term mean reversion, as you are relying on that high win% as you don't let winners run as much.

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thetrendfollowe

Registered: Oct 2007
Posts: 315

12-15-09 04:41 AM

Though I should say that solid trend following systems should of course outperform random entry systems, as you look for breakouts or uptrends.

I personally look for breakouts in established uptrends.

My point was that random entry systems don't fare as badly as you think, and that most of the edge of trend following systems is in fact due to their trade management (exits, stops).

Great discussion by the way guys.

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kiwi_trader

Registered: Aug 2002
Posts: 3719

12-15-09 05:02 AM

Quote from thetrendfollowe:

Though I should say that solid trend following systems should of course outperform random entry systems, as you look for breakouts or uptrends.

I personally look for breakouts in established uptrends.

My point was that random entry systems don't fare as badly as you think, and that most of the edge of trend following systems is in fact due to their trade management (exits, stops).

Great discussion by the way guys.

Saying "most of the edge is due to their trade management" is falling into the classic old error that caused people to focus on entries / psychology / your current poison.

It is always a combination of things that creates a good result. I can generate entry signals that perform extremely poorly with a trend following trade management style ... but well with a small target. And vice versa.

Also, there is more than one way to evaluate an entry. If you want to catch long trends would you take an entry that has a low w% but when it does work positions you for the trend?

Its the package that works not the paper, the string or the tape alone.

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