Van K. Tharp's Random Entry System
- Thread starter Remiraz
- Start date
I have no doubt that Doc Tharp is the life of the party with his coin flips and his bag of marbles. The question is, does he actually trade with real money and does he use this method? If so, then let us pay attention and take notes. If not, then why all the hoopla? Because if he doesn't, then why would you? What is the point? How much of a non-trader's introspection do you really need? Reportedly, he "coached" many trading luminaries. That is his claim to fame. But, if I am not mistaken, he did not actually teach these luminaries to trade. I think his coins and marbles are his way of converting a simple point into a lucrative career (seminars, courses, tapes, workshops, etc.).
Obviously, stops and exits are integral parts of a trading program. But anyone who dismisses the importance of entries is simply not deriving his principal source of income from trading.
Obviously, stops and exits are integral parts of a trading program. But anyone who dismisses the importance of entries is simply not deriving his principal source of income from trading.
...I don't trade anything with a wins/losses ratio of less than 0.5. A nonscientific explanation is that that would imply worse than random rules. If you're testing a system and find that that ratio is less than 0.5, then you have a possible candidate to trade the opposite rules, because the expectancy is usually strongly negative. Sometimes that works. I found a couple of half-assed systems that way.
Misctrader:
You are asking a question that goes beyond this thread.
Look at moneymanagement topics and expectancy topics to get that question answered.
To help you on your way: If you buy a stock at $50 and your stop is $45, two things can happen. It can hit your stop or it goes up.(Yes, yes I know, It could also not move and hang for six months around $50)
Now, when it goes up let's say to $60, then you can for example move you're stop to $55 and buy some more stock at $60 because your risk is gone, and so on...
Read some topics about it...
Traderkay:
That is exactly the point I explained to Runningbear. Backtesting an Idea is more then just run it through your software. You can not duplicate the result if you do not have the same tools.
For example:
1) which datasource did you use?
2) Do you know your software in and out? Many people think they can "program" an idea, but even don't know how the software deals with your buy and sell signals...
3) Did you follow all the rules that they have used?
4) which time frame did you use?
5) Did you test all the markets that they use of only the market that they didn't use like the s&p?
6) How did you deal with the rollover contracts?
Do you all understand that backtesting an "idea" is different for everybody??? That is one of the reasons I'm not a huge fan of backtesting...
Thunderdog:
Van Tharp trades. And once again the example of this system is not to dismiss the importance of an entrysignal but to make a clear statement that exitrules are far more important. Still most people are looking for the "right" entry point. It is the exitrules that make you a good trader, not the entryrules...
Hypostomus:
That's funny, I do not trade systems of a win/loss ratio more then 0.5... My avarege win/loss ratio is 35%... Gee I wonder where all the money is coming from
You are asking a question that goes beyond this thread.
Look at moneymanagement topics and expectancy topics to get that question answered.
To help you on your way: If you buy a stock at $50 and your stop is $45, two things can happen. It can hit your stop or it goes up.(Yes, yes I know, It could also not move and hang for six months around $50)
Now, when it goes up let's say to $60, then you can for example move you're stop to $55 and buy some more stock at $60 because your risk is gone, and so on...
Read some topics about it...
Traderkay:
That is exactly the point I explained to Runningbear. Backtesting an Idea is more then just run it through your software. You can not duplicate the result if you do not have the same tools.
For example:
1) which datasource did you use?
2) Do you know your software in and out? Many people think they can "program" an idea, but even don't know how the software deals with your buy and sell signals...
3) Did you follow all the rules that they have used?
4) which time frame did you use?
5) Did you test all the markets that they use of only the market that they didn't use like the s&p?
6) How did you deal with the rollover contracts?
Do you all understand that backtesting an "idea" is different for everybody??? That is one of the reasons I'm not a huge fan of backtesting...
Thunderdog:
Van Tharp trades. And once again the example of this system is not to dismiss the importance of an entrysignal but to make a clear statement that exitrules are far more important. Still most people are looking for the "right" entry point. It is the exitrules that make you a good trader, not the entryrules...
Hypostomus:
That's funny, I do not trade systems of a win/loss ratio more then 0.5... My avarege win/loss ratio is 35%... Gee I wonder where all the money is coming from
hypo:
Yeah, I know what you mean. I tried to have something with at least 50% win/loss ratio as well. Ideally 60-70%(which is hard). But if you read Trading As a Business, the author notes that most trend following system has only 30% right. Which is true. Because if you do a backtesting of "simple" trend following, it's only right 30% of the time. So, how do the Turtles and Dennis, Kovner, Seykota do it? I guess when the market trend they must put on HUGE positions to offset all of their small losses? But then the question becomes when do you know it's supertrendy vs just trending then back to choppy?
But I dont' think it would be sensible to do opposite of the simple trend following system does. The other 70% losses are due to NOISE! When the market is choppy. If one was to do the opposite I'm assuming the losses would be astronomical because you would go countertrend on super trend days and get KILLED! hehe.
what system have you tested that are above 50% win/loss?
...you just wrote Chapter One Backtesting 101! I wonder, since you take issue with my obviously stupid assertion about less than 50% hit rate (true for me, untrue for you, go figure), did you have to optimize the "core" rule with stops, reverses, or takes to achieve that? What I'm getting at is that I often find that an initial rule set that works well doesn't much benefit from further optimization. Thanks. - Mike
...I can't say about trend following systems, since haven't gotten one that works yet without long flat periods. Net is OK, but I hate the waiting. I have systems which have 2:1 or 2.5:1 hit rate, but it's at the expense of fewer trades, although not always lower net. It's a matter of adding more rules. Basically I bias my system selection in favor of trading more often, even if the net is lower than a system which trades less often. I hate sitting there doing nothing, so I'm willing to pay for the entertainment.
Wow, Mike, It is not my intention to dish you're believes how to trade. If you find that you're win/Loss ratio must be more the 0.5 then that will work for you. I do not find anyone or anybody stupid because the have a different believe or style then me...
I'm not sure I follow you're question about optimization:
But I hope this can clear more of the smoke there is about trendtrading...
Trend trading is all about many small losers and very few large winners. But that is not all: I believe that every trading system( Trend or non trend)must have small losers and very big winners( at least between 5 to 35+ times you losers).
Example: If I lose $1 everytime I'm wrong, but win $35 when I'm right, then I can be wrong many times... But this trading style has also a downturn: You could have losingstreaks of 25 trades and more... And that is very difficult for many people.
The reason way you are more wrong then right is because you use small stops to increase your multiples of winners:
If a stock stands at $50 and goes up to $60 you can have to different results:
A) You're stop is $10($40) big, then you have a 1 to 1 winner.
b) You're stop is $1($49) small, then you have a 1 to 10 winner.
If you use money management and risk 1% then in example a you have 1% increase of capital and in example b 10% increase of capital.
When you use the b style of trading you are more wrong then right, for the obvious reason.(the stock goes quicker to 49 then to 40) but it is my believe(and experience) that this makes more money then the A style of trading.
I'm not sure I follow you're question about optimization:
But I hope this can clear more of the smoke there is about trendtrading...
Trend trading is all about many small losers and very few large winners. But that is not all: I believe that every trading system( Trend or non trend)must have small losers and very big winners( at least between 5 to 35+ times you losers).
Example: If I lose $1 everytime I'm wrong, but win $35 when I'm right, then I can be wrong many times... But this trading style has also a downturn: You could have losingstreaks of 25 trades and more... And that is very difficult for many people.
The reason way you are more wrong then right is because you use small stops to increase your multiples of winners:
If a stock stands at $50 and goes up to $60 you can have to different results:
A) You're stop is $10($40) big, then you have a 1 to 1 winner.
b) You're stop is $1($49) small, then you have a 1 to 10 winner.
If you use money management and risk 1% then in example a you have 1% increase of capital and in example b 10% increase of capital.
When you use the b style of trading you are more wrong then right, for the obvious reason.(the stock goes quicker to 49 then to 40) but it is my believe(and experience) that this makes more money then the A style of trading.
That's not what it says at all. He wrote, "it made money 100% of the time when a simple 1 % risk money management system was added." Emphasis is mine. And then you have to also consider how many times the system was traded, and he doesn't say.
Interesting is to do a search on Tharp's forum for "random entry" and read through his posts on the topic. Found one where Tharp says he's not advocating random entry as a system (It's apparently in the book to prove a point about exits):
http://www.mastermindforum.com/phorum/read.php?f=9&i=4160&t=4129#reply_4160
...thanks for your reply. It's always interesting to understand the philosophies which underly other people's system designs. Your views on trend trading are particularly interesting to me, since I have never designed one that worked to my satisfaction. - Mike