I thought Van Tharp studied this and concluded that random entry was pretty good and beat many other systems, and that trade management was more important. Entry was one of the least important factors to successfuls trading. (Also, note to JMowry, I think it was the Turtle Traders that used a method of scaling into winners, not out.)
Although someone breifly mentioned it, the cost of execution (commission and bid/ask spread) is a far bigger factor than most people think (imho). Sure, the system outlined above can break even theoretically, but factor in coms and the spread and see how dramatically it changes. Of course, if you're trading massive size you can reduce the effect of commissions to a degree, but not the spread. - The New Guy
The reason why it doesn't work is because our psychology will behave differently once a trade is entered. You may have a small gain when being right but lose big when being wrong because of our psychology face to loss is not the same as face to win, loss is more painful than gain.
Yes they assume they are being called a certain type of gambler - unskilled and or compulsive or in it for entertainment. There are several classes of gamblers. Proper trading is in fact skilled gambling, skilled both in analysis and skilled in control of the emotional/behavioral factors. It is gambling because the outcome could be highly probable(high expectancy), however not completely certain. Regarding a random entry on a random price the average outcome will be 0 - commission, no mater what exit. If however the price is not random but driven by technical factors or fundamental or both, you can make money based on the rules governing their behavior.
Van Tharp was wrong on this one. Having a good entry is a very important part of most systems. Random entry has been attempted many times and, when done properly, never produced better than random results. If you go to www.wealth-lab.com you can see people wrote several scripts to test several types of random entry. I wrote a few programs myself and got pretty much the same results. Try running any random entry set of rules on any basket of stocks and you'll see what I mean. On the other hand, you could in principle find one or more markets which are subject to be profitably traded with random entry during a restricted period of time but in that case it would be a property of that particular market, not a general principle. However, if someone is really making money with random entry, please report, I'd be curious to know. GS
Van didn't draw that conclusion. It was raised on his forum a while back and his son explained the test they'd run which combined "not quite" random entries with a good trailing stop methodology on trendy markets. It would actually perform much worse now as the markets have been less "trendy" than they were when he was testing the trailing stop.
Yes I know it was more of a "challenge" aroused with Tom Basso in one of his seminars. However, Tharp reported it in his book, thus implicitly attributing value to it. But then, as you said, if your market is trending it really doesn't mean WHEN you entry as long as you entry on the right side! Instead, a true random entry should randomize the side, too. Otherwise, it's too easy... GS
You are correct that at any given moment a stock price may move up or down, or even. This is looking at the next tick of the stock. What you haven't thought through is this: Do you consider it profitable if the stock moves from say 22.10/share to 22.11? Even if you bought 1000 shares, the cost to buy and sell will eat up your profits. Ok, so now you say that for argument sake you would set the win price at 22.30. Now it is not flipping a coin at all. Yes it will hit the price or NOT hit it, but that does not mean the odds are 50/50. That is akin to someone in a poker hand saying I will either win or lose so the odds have to be 50/50 right? Of course for me when I have pocket aces, the odds of me winning are nil!! lol. One thing which you hinted at in your message is worth focusing on: Maximizing your winners and limiting your losses. This is one of the most difficult things to do and yet it sounds so simple. Let your winning positions ride and cut your losers quickly. I think a good thread on how to better execute that strategy would be highly worthwhile! cheers.