Van K. Tharp's Random Entry System

[Stock_Lover]

Quote from dbphoenix:

There have been a number of assumptions "outlined" and I don't know which you're referring to. And you don't say whether the trades are losers or winners or one of each or in what order. But if the profit target is the same as the stop, your question has already been answered. Several times.

Trend following systems usually do not have profit targets.
Trends can last for quite a long time. That's the beauty of riding a winner than makes 30 times what your risked. You are exited usually by a trailing stop.

Cut your losses short and let your winners run

 

[dbphoenix]

Quote from Stock_Lover:



Trend following systems usually do not have profit targets.

True. But several premises have been introduced into the thread since the initial one. I was addressing one in particular.

 

[Vienna]

I personally know someone who is hugely successful with his financial company (offices in 60 countries), and so quite believable. He spent a year in an office with Marty Schwartz (of the book "Pit Bull"). He told me he saw Marty trade for two weeks, 20 times a day, with hardly a losing trade.
Marty has been making between 2 and 5 million Dollars a year for the last 15 or 20 years. He put on positions of 100 000 shares or 200 ES contracts at one time...

So, either there are vastly different ways of making money trading, or the guys that claim that you can make money with a small percentage of winners might be right theorethically, but the question would be how much money and can you trade it?

Regarding the good Dr. Tharp and his famous expectancy, my feeling is that a real trader would have much more crediblity. I saw Tharp trade a trend following system in his newsletter (based on buying strong stocks that went straight up, basically), and when I stopped following it after several months he had not made one cent, notwithstanding his money managment skills.

 

[Specul8r]

Quote from Vienna:



So, either there are vastly different ways of making money trading, or the guys that claim that you can make money with a small percentage of winners might be right theorethically, but the question would be how much money and can you trade it?

Good post Vienna,

Speaking from experience, I have traded styles/methods that have produced under a 40% hit-rate that were very successful over a long-run of trials. At the risk of sounding like a walking cliche, the key is truly being really right when you find your position is in harmony with the underlying market; ie adding to winners. It takes nerves of steel to trade this way and it is almost im complete discord with the human condition. You must be not only willing to play a very tight game when the market does not confirm your initial premise, but you also have to leverage open profits and add to your positions when the market does confirm.

All in all, trading this way can be a very viable endeavor, but it is most certainly NOT for everyone.

PEACE and good-speculation...

 

[Vienna]

To take this even further, the theory that entry is unimportant and ONLY the exits count explains why Tharp thinks that psychology is the most important element (besides the fact that this theory happens to be beneficial to his business): if you trade systems that have 10 losers in a row and then one winner of hopefully 11R, of course you need to focus on psychology, because your mind will explode by the time you hit loser number nine, you will be tempted to quit, and if you do, your "trading coach" can point the finger and say: "See, I told you it's ALL psychology!".
But in my opinion this starts with the wrong assumption and then logically proceeds to the wrong conclusion. As I said before, I saw Tharp start with what he called a "low risk idea" for a system(which should certainly beat the random coin flip) and apply all his bag of tricks of position sizing and end up with a flat or even slightly negative result.
I am not saying that you can not make money with less than 50% winners, many have. It is less that Tharp's viewpoint is wrong than that it is exagerated, in my opinion. It is one of the ways but certainly not THE way to riches (otherwise the good Dr.would be a billonaire) and probably not what the best guys are doing.

 

[Banjo]

I simply never could get into Tharp's logic. Every trade consist of an entry, decision making in accordance with the unfolding circumstances and an exit that is the result of that decision. What is the great revelation here? Random entries are total bs, a random entry machine could easily generate 10 entries that immediately went south. I'd love to hook up a Vegas electronic slot machine to some of these trader's systems that think entries aren't important so that it goes off about 20 times a day , ding ding you're in, and see what happens. Tharp talks about expectancy, the mere concept of expectancy requires a starting point, an entry from which we expect the trade has a chance. There's a flaw in this minute discection of the process imo. It can focus peoples "trade awareness" into a sort of "smallness", trading for ticks.
The real $$ is made simply dumping losers fast which keeps ones head clear and prepared for the next opportunity which may even be a re- entry into the one just dumped at a better price /time and knowing when to "lean" on a winner, feeling it and acting on it.
Specul8r has it right , it takes experience, you're not going to get it from a book.

 

[steve46]

Vienna:
I liked your comment regarding Dr. Tharp's assertions. I have read most of his published work including "Trade Your Way to Financial Freedom" and "Financial Freedom Through Electronic Day Trading" written with Brian June. I think Dr. Tharp has become quite sophisticated in presenting ideas that have great appeal to the beginning trader, or to the person who may not have the resources or inclination to check the math. At the same time the role that random chance plays in our success is minimized and of course there are numerous charts showing how a person could make incredible amounts of money simply by managing position size. I believe Dr. Tharp is "betting" that none of his readers are going to break out a Monte Carlo engine to see how realistic his claims are. In my experience, success in the markets is more readily found by trying to localize non-random behaviors. I notice that no one seems to want to write a book about how to do this. Isn't that interesting? Best Regards, Steve46

 

[Stock_Lover]

Quote from Specul8r:





All in all, trading this way can be a very viable endeavor, but it is most certainly NOT for everyone.

This is what makes the markets great. Many guys can have something laid out right in front of them and not see the picture.

 

[dbphoenix]

Quote from steve46:

In my experience, success in the markets is more readily found by trying to localize non-random behaviors. I notice that no one seems to want to write a book about how to do this. Isn't that interesting?

Actually, that's largely what Mark Douglas' books are about.

I'm glad to see you guys posting your thoughts about random entry. I was beginning to feel like a very small minority.

 

[Vienna]

Thanks Specul8r and Steve,

I think there is a fallacy somewhere in that random logic thing. If you don't understand how markets move, you can't profit from their moves. Then you claim: "It does not matter if you enter in profitable moves. Entry does not matter!". Of course not, at least in your case: you might as well go random. I always felt this was hogwash. Yes, if you trade channel breakouts or some turtle-like trend following system, have a million dollars, and trade in 10 markets at the same time, you can eke out a living that way. You basically optimize a small statistical edge. But my point was: the real supertraders don't necessarily do it that way.

Actually, the interesting thing about the Marty Schwartz story was that my friend told me that Marty did almost everything the opposite way you are supposed to do it: he took profits as soon as they were there, often he did not let them run at all. He did not go for high R-Multiple winners. And when he felt he was right, he added to positions going against him. Go figure! And (I was imprecise in my previous post) my friend also said "I watched him trade for two weeks, 20 trades a day, and he did not have a single loser!". So there are many ways to skin a cat...My point is that Marty apparently REALLY knows how the markets work and therefore trades completely differently from what is the accepted gospel of some trade "coaches". So don't believe everything you read...