Strange Effects: Trading on a random system

Someone in William Eckhard office played
a prank trade competition. He used a
random -walk model. 95 percent of traders
did worse then a purely random trader would.
They would have done better if they had rolled
I dice.

This point could be the most significant
Point regarding being a good trader.

Go to page 234 of "The New Market Wizard"
And read about what William Echhardt has to
say, immediately.

Crap money management + positive expectancy = lose
Good money management + negative expectancy = lose

Good money management + positive expectancy = FTW

What’s the FTW acronym?

what about Good money management + neutral 50:50 expectancy?

Let me google that for you :stuck_out_tongue:

LOL I deserved that!

ok, how about FTD? it’s on google but I don’t mean flowers.

If n = infinity, you will win nothing and lose nothing. Though, to be fair, if you’re getting 50:50 including spread, slippage, swaps, etc, you can pat yourself on the back because you’re technically “profitable”.

Errrrmmm, Let me acronyms.thefreedictionary that for you??

This doesn’t help me, my friend. I am sure many of the
95 percent understood this much, no? I need more
insight on how a random-walk has on a forex trader.

There are systems to follow and there are traders.
The system need to be good but so does the trader.
The effect a random-walk has on a trader, is a good
way of monitoring ability/progress , no?

I was going to answer my own question but didn’t know if neutral implies that that spread is included. If not then the spread is a cost so you are negative.

:smiley: FTD contains some four letter words 'effin t1ts dude!" meaning ‘awesome!’ probably just a local expression. Actually I replaced the word ‘man’ with ‘dude’ because if you google FTM there are entirely different meanings.

somewhere on this forum and also on FF forum I think. Someone did an experiment of entering trades based on the flip of a coin. I didn’t follow the thread but I recall someone saying it is profitable depending on money management. I’d rather have good entries though. price is not random after all.

OK, I’ll play. Most price action is back and forth in a fairly narrow range most of the time. If you take a trade and wait until it is a loser of say 75 pips, or you are a millionare before you close it, you should lose the vast majority, if not all of the time. Even if the trades you pick have a positive expectancy of initially moving in your direction, using the “I’ll lose 75 pips or make 1,500 pips”, money management plan should lose almost all the time, and indeed it does.

So, you can ask yourself, and I’m sure you have, if we have discovered a moneymanagement system that loses 95% of the time even with a positive expectancy, can’t we reverse it and win 95% of the time, even with a negative expectancy? I’ll leave you to work out the math, but if you place many trades risking 1500 pips to make 75 pips, you will win the vast majority of those trades, even if you have a slightly negative expectancy.

The problem is you will occasionally lose the 1500 pips, and of course you lost spread on every trade. When you do the math, you would need to have a very strong positive expectancy to overcome the spread cost of many trades and the occasional loss of 1500 pips to come out ahead. But if you have a strong positive expectancy system, strong enough to overcome spread, why not trade it with a more conventional moneymanagement system, like use a SL of 1 X ATR and a TP of 2 X ATR, or anything more conventional? The results should be the same, but draw downs should be much less and profits should be much more consistent.

Of course, all that is just my own humble opinion :slight_smile:

Do I win a prize?

Not trading by the toss of a coin but trading on a purely random market(
Random-walk). I have a hunch it is possible to make money consistently.

That may be possible. But the forex market is not random. But the toss of a coin is random. So if you were to use a coin toss or dice or similar for entries then I would think that would have the same effect as entering a random maket.

And you would be wrong.

Why would that be wrong?
I mean the price movements would still not be random but if your entry was random then wouldn’t your results be random?
That’s assuming you don’t have any trade management or money managment rules.

maybe I’m just missing the point. A definate possibility.

Anyway, I think if prices were purely random then there could be no positive expectation and you would come out a looser in the end with the broker taking their cut. I don’t have any evidence to back that up. It’s just my opinion.

Yes, the market wouldnt be random, but the result would be random :slight_smile:

I just thought it was worth pointing out the difference.

If you have 30% chance of getting heads and 70% chance of getting tails, a fair coin toss won’t affect that.

There is order even in chaos…

Things that occur in the market repeat monthly, weekly, daily, hourly, and minute by minute.

The only real difference is where those things occur in time, and where they occur in value.

That is what makes the market seem random…

I dug through my jar of spare change and couldn’t find a ten sided coin…

I want to bring the point of the effects of non-random
on a random system not vis-versa.

Take for example say Forex was completely random
and there is no slippage whatsoever, to simplify things
. You try to make some money by controlling entries and
stop-losses accordingly, do you think that it would be
possible to profit from this random forex market.
Or do you think that the attempt would be no
different then a random trader, trading on this
random system or to the extreme, a trading wanting
to lose money.

I still don’t think it would work. Since fx prices aren’t random, then you could look at a system that we know is random and then test the idea that such a system could be traded profitably.
You could generate a series of pseudo random prices using a random number generator for example, of course you couldn’t just pick prices at random and skip numbers in between since you are trying to mimic the market. The only time that happens is when prices gap and so far I haven’t seen that in fx prices.

speaking of random and probabilities. we play a dice game with 6 dice. if in one roll, all 6 dice come up with sixes showing, or ones showing then it’s an automatic win. I saw it happen once. I think the odds are something like 1 in 50,000 ?