Techniques for Managing a Random Entry

ok, i think it would work. but, why isn't everyone doing that..if it's so easy... ?? (i don't even do it, and i made this post)

 

So what does that tell you?

 

Probably because most people wouldn't feel so hot about taking a random trade. They'd inject thoughts and biases about which way to go, etc.

Also, what you bring up in covered in depth in "Statistical Calculus of Financial Theory." It is part of the "random walk" theory and it goes into binomial, Markov process, etc.

I have a .PDF file that covers everything you'd ever want to know about finance theory, including equations on optimal excerise periods for American Puts and Calls. Actually, it contains everything you'd ever want to know and more.

(It is very heavy into mathematics towards the middle and, if you can stomach it, gets ugly near the end -- but you may be able to pick something out of it).

Here is a question for you, Gordon. It took me some time to figure out the answer because it wasn't obvious.

Let's say a trade has a 50% chance of going to either 48 and 52 from a starting point of 50.

If you were to randomly trade that overtime, you would theoretically break even (ignoring commissions, etc). However, let's change one small parameter.

If the price gets to $48.50, we scale in with another equally weighted position. Since, by the laws of mathematics, it always has a 50% chance of going either direction, if we stop-out, we lose $2.50, but if it goes our way, we make $3.50.

What is the error in this logic?

 

aphie, are you saying there is a problem with my logic in the above example?

if from the price of 50, there was a 50/50 chance of it going to 48 or 52, but i instead sold at 49...i know 49 would just occur more frequently. actually, i think it was mr. sub that explained this very well in another thread.

however, my example is not doing that. my example is changing the size of our position. we will still hold to 48 or 52, but if it goes to 49, our size will be smaller....so that if it goes to 48, we lose smaller than if we had a full position going to 48. if it goes to 52, we will have a larger position than exiting at 48.

 

Nice thread... I'm interested in what others have to say but I'll start with my input.

1. I'll get out. Well, that's what I would do. Trading for no reason? C'mon. Reason for entry and exit is pretty much connected for me. My exit = I'm wrong with my analysis that I based my trade on. So without it I would just get out.

2. Disregarding what I said on 1 and concentrating on profit taking. There's a few things. Most likely, I'll use partial exits. I'll take some profits when I can, then let the rest ride. When it goes against me, I'll just take them out. I would like to make at least 1$ out of the trade. If it keeps on going favorably, and the equity stops at a certain price, partial again... and so forth.

3. Now if I had charts and other stuff to use. It'll be different. I'll do what I always do but with a position already inside. Depends whether it's favorable or not. If it is then I'll try to do the most appropriate based on the analysis. If it's unfavorable, exit regardless of potential.

 

it has been brought to my attention that my idea won't work.

 

Scenerios:

Goes to 49 and reverses to your target, you make $500
Goes to 49 and continues to fall, you lose $1,500
Goes to 52 without ever reaching 49, you make $2,000

So I'm assuming the probabilities must be that going straight to 52 happens 50% of the time, going to 48 happens 50% of the time ....

Well something is wrong with this picture, I just need to do the statistics. You can't beat a random system like that (I'm not saying the market is random! But this thread is called "random entries")

 

Nice contributions so far.

There are some traders out there who usually have an opinion ready to go on how not to do it, or why this or that way is lame.

Here's your chance guys and gals. Tell us your ideas about the right way to do it.

 

Gekko, Aphie... you're looking at strategies in hypothetical situations with If then else... logic. It's great that you're doing it but it's not really going to take us anywhere.

Maybe we should narrow the subject to real market situations.

"What would you do if you randomly entered in a position based on real market conditions?"

Let's also stay out of why you went in randomly.

That maybe a primary problem of you two (you 2 claim to have major problems trading), too much of the hypothetical "what ifs" and "how abouts".

Again, let's stay out of what I just wrote about too.

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Now that said, if I randomly enter a trade.... please go back to my previous post in this thread.

 

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