[ol]
[li]Entry Criteria
[/li][li]Trade Management
[/li][li]Exit Criteria
[/li][/ol]
A lot of traders spend endless hours focusing on developing their entry criteria. Finding just the right combination of sparkly indicators to tickle their fancy. And then nonchalantly place their take profit level at the nearest arbitrary support or resistance line, giving it almost no thought. Yet they manage to turn a profit.
So what if we gave no thought to our entry? [U]What if whether I bought or sold at any given time was completely random?[/U]
Could I create a positive expectancy using just trade management and my exit criteria?
Logic would say, “no.”
But let’s see what happens, just for fun.
What prompted this thread was information in the same vein I have found on various other forums. Tales of traders who flipped a coin for entry and could manage themselves into positive expectancy. However, the threads were all abandoned before a true conclusion was reached. Thus, I was left to ponder the two possible conclusions:
[ol]
[li]The trader lost to the spread over the long run, proving trade management and exit criteria hold no inherent edge.
[/li][li]The trader became rich and was too busy picking the color of his Maserati to come back and update the thread.
[/li][/ol]
The curiosity was killing me, so what better way to get an answer than to find it myself? After all, it should only take a few minutes of my time each day.
I’ll be away for the weekend, and back early next week. Expect more then, likely in the form of backtests of crude EA’s.
Thanks for sharing that with me. I read about 30 threads on this topic on various forums last week, and I somehow missed that one which was easily the most helpful.
The expectancies of various increasing R:R ratios is exactly how I was planning to start my research out. So it’s good to have some results to compare against.
Although MeiHua was just using the random entry to prove a point that high R:R ratios inherently provide positive expectancy, I would like to elaborate on that and attempt to refine that edge as much as possible while still using the random entry. I think this will be a fun little project.
Just an example of why raw Martingale will never practically work with a 50/50 system. Using a $10,000 account with a starting lot size of .001 (100 units), 20 pip TP/SL.
The orange box represents the point at which I could no longer practically open any trades due to leverage restrictions.
Red boxes represent the point of complete ruin of the account, which would occur between the 15th and 16th losing trade as a margin call if I had infinite leverage in order to open the last couple legs of the Martingale.
Green boxes represent the point at and beyond which the system would have positive expectancy, but this cannot be achieved without infinite funds.
No matter which way you manipulate the starting balance or lot size, the account is almost guaranteed to blow before it doubles; certain to blow at some point in the future.
Clearly raw Martingale is not the answer. Which is common knowledge, but I like to test everything myself rather than taking someone’s word for it. I always learn something extra.
Thanks, I had forgotten about this post. My trading used to be a smattering of random ideas like this that all ended up leading to nowhere. Lol.
I meant to update it with my findings but I guess it slipped my mind. The random entry can work, but not consistently. It needs a strong trend in place, and you need to place your stop outside the volatility of the market.
The only reason MeiHua generated positive results in the thread d-pip linked above was due to the strong uptrend of EUR/USD during the first decade of the new millennium. He placed his stop outside of the volatility by using an ATR-based stop. The trend carried him to “victory.”
In which case, why go short and take the losses. You could’ve generated better results by only going long and trading with the trend. I believe I saw at most a 35% return over a decade on EUR/USD. Every other tested instrument lost or broke even. Why bother - anyone is better off just investing in index funds at that point.
