Can you be profitable with random entry?

Discussion in 'Strategy Development' started by Tremaine, Jun 11, 2006.

  1. Tremaine


    In his book "Trading your way to financial freedom", Van Tharp claims that it is possible to make money (consistently!) with random entry as long the rest of your system is well designed.

    I find this hard to believe but the rest of the book makes a lot of sense, so I'm wondering íf there could be some truth to this. Could it be for instance that markets which display certain charactaristics can be traded with random entry?

    I don't have the tools to test this idea properly but was wondering if someone else might have done it and be willing to share their findings?

    For those of you that havn't read the book, here's a small recap:

    Van Tharp used $1 million account and risked 1% of equity on each trade. He traded 10 markets at the same time, and was always long or short in each of them. He used a trailing volatility stop set at 3 times the 10 day exponential moving average of the average true range. After being stopped out, Van Tharp would instantly take a new position in the same market - short or long (determined by coin flip).

    That's it. Van Tharp claims that this system was making money 100% of the time, even with $100 for commision and slippage per trade.

    A few things are not mentioned in the book:

    - The period used for the ATR. I'm guessing 14 days.
    - The markets that were traded (contracts are mentioned however).
    - What kind of data the system was tested on. If daily data was used, did the system enter next day on the open after being stopped out for example? Or same day at the stop price?

    Anyway - I find the claim very intersting and would love to hear what people here on ET have to say about it.
  2. Tremaine


    I forgot to mention:

    Tharp recalculated the volatility using the menitioned formula regularly and moved his stop accordingly in order to lock in profits. He does not mention how often but my guess would be once a day (I suspect that the tests he made were back testing on daily data).
  3. Whether the 10 markets he picked had strong negative correlations?
  4. Search ET about this. If not happy, give it a try with your real money! Never read about someone having done that. :D

    (Don't forget to tell us about the real money outcome.)

    PS: VT doesn't write for winners. He writes for the much bigger sized loser's (book) market.
  5. Tremaine


    I don't see how it would matter. He took a long or short position based on a coin flip. Am I missing something?
  6. Tremaine


    I tried searching for the topic on ET but couldn't find anything.

    Btw, Tharp is not suggesting that you actually trade using this system. He simply uses it to demonstrate one of the major poits of his book: That entry is one of the least important components of a trading system.
  7. That's only after stopping out, isn't it?
  8. Tremaine


    What do you mean that by that? That his books appeal to losers or that following his advice will make you one?
  9. Sounds as convincing as our beloved Jack's reasoning.
    What do you need in order to "demonstrate" anything about market strategy?
    Think again. :)
    #10     Jun 11, 2006