Van K. Tharp's Random Entry System
- Thread starter Remiraz
- Start date
Yes in a system that produces the same positive results as losing results.
But if your winners are much larger than your losers than you do not have to increase your size.
If you lose 1/2 % each time but when you are right
ie catch a trend you make 40% you come out ahead.
What if you were to imagine stopping out everytime a stock went down 5% and your position size allowed a 5% stop to be a 1/2 % risk of your capital. Small losers happen for quite sometime.
Than a trend develops in a trade you enter. You are still risking a 5% (this is away from the market not % capital) stop but now have 10% gained.
Somebody asked about when to know when to put on larger positions. Well let your winners run. If you have a winning trade that is working in your favor add to the position slightly.
This 2nd trade should be considered a separate trade.
Soon the market move again in your favor. You now have had a few different winning positions that resulted in positive expectancy.
You may be risking 5%, but the dollar amount is less. Therefore, you have to risk more in order to get back to where you were in the first place. Either that or obtain a higher probability of one or more winning trades. Which is where strategy testing, including the selection of entry point, come into play.
Tharp's quoted as saying that this "random entry" system had a 38% reliability (and he traded it for how long?). If I were entering on a completely random basis, and given the best trade management in the world, I'd still sure like to see more than a 50% win ratio just for the sake of my nerves.
Quote from Specul8r:
DB,
Are you seriously suggesting that a speculator needs a hit-rate greater than 50% to take money from the market?
Maybe I am just not understanding you correctly
All of my comments are within the context of the thread, i.e., Tharp, random entry, position sizing, etc. Your question is so general that it can only be answered as yes and no.
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no the dollar amount is the same.
$100,000 as an account balance example.
Risking 1% would mean $1000
1R as Dr. Tharp uses.
But a win of 20R , 30R or even 40R .
Now if you risk $1000 and are wrong 20 different times you will be in a drawdown of 20% and have lost $20,000.
Now say you get that 30R winner. (Ie you finally catch a trend)
You are still risking $1000
but you just made $30,000 or $10,000 about your original capital.
You never risked more than $1000. No bigger bets size. If stops are used and adjusted it is possible to keep risk in tack.
Actually in Trade Your Way to Financial Freedom as I recall it was shown that you reduce your bet size in a drawdown. That 30 times what your risked winner still puts you in the green.
Both sides of coins can win. There are great systems that have a probability over 50%. They usually involve smaller timeframes, small losses and very small wins. The winners are not ridden for very long.
But a system that less than a 50% probability of being right but much bigger winners is something being done all the time.
Somebody posted their spreadsheets to show it even.
Hi Stock_Lover,
thanks for the input. My experience is that patterns, which have a fairly good level of predictability on daily prices degrade very fast to 50:50 when applied intra-day. Adding comissions, you are eaten alive.
Could you be so kind a give us and idea of what a great system does differently in smaller timeframes.
Cheers, Oliver
Sorry, but it doesn't work out that way. If you lose $1000, you then have $999,000, 1% of which is $999, not $1000. In order to get back to breakeven, you have to risk more than 1%. If you want to risk only 1%, your winner, assuming you have one, is going to have to bring more money in than your loser lost. This is unlikely to be accomplished with no plan and with random entry.
We all seemed to repeat that mantra. Ride the trend of your big winner to make up your losers. I have backtested several trend systems that have about 1.75:1 or 2:1 on the average win. But because the win % is so low 30-35%, it end up being net down. Then IF you account for slippage and commission then you are REALLY down.
So, it's not that simple. I think position sizing might be the key. But the question is when to bet big? What happens if you bet big thinking it's the beginning of a huge trend, but it turns out to be fake and then drop back to the trading range? Then not only are you down, you are down HUGE.
all these trading idioms sound very nice and good on paper, but to test it or trade it in reality is a totally different thing..
it ain't so simple i think...
what ya think?