To all of us who would really like to believe that our indicators will make us into successful traders, I can do no better than to introduce you to the coin-flip exercise. These are Woodie’s rules:
1. At the beginning of every five-minute bar, he flips a coin. One side is labeled “Buy” and the other side is labeled “Sell.”
2. Hold until you have a loss of X or a gain of 2X. Woodie trades the mini-Dow and the mini-Russell 2000. So he allows a loss of 10 ticks and has a target of 20 ticks.
3. If he gets a profit of +8 ticks, then he moves his stop-loss to Break-even + 1 (BE+1)
4. If the trade stalls out, then after three or five bars, he will exit with whatever profit that he can get.
That’s it! No indicators. No CCI, MACD, Stochastic, Doji’s or other candlestick formations. Just a simple, random binary device – a coin.And, over a long period of trades, he usually ends up with a profit! Doesn’t that just rot your socks!
Now are you still wedded to that high level of belief in your preferred indicator or trading methodology?The key here is the money management rules. Even with random entries, he can usually find enough winning trades and, because each winner is twice the value of the losing trades, the cumulative effect is to end up with a profit. Another key is his rule to move his stop to BE+1 so that even if a trade isn’t a 20-tick winner, he’s still able to hold onto his money and have it available for the next trade!
Now, the next time when the market seems to be slow or inactive, try the coin-flip exercise. You just might find enough profit, even with totally random entries, to start to challenge your beliefs about your chosen indicator or methodology. You might cause enough dognitive dissonance ao as to really make you uncomfortable. It just might be enough to help you to change your beliefs.p.s. Woodie’s statistics can be found here: http://woodiescciclub.com/forum/viewtopic.php?t=1317
You will have to register to see the statistics. Don’t worry – it’s all free.
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4 comments:
this reminds me of a note made by william eckhardt, one of the market wizards...he said that he believes, that the majority of traders trade worse then a purely random trader would do...btw, the problem with this game is, that it is not a "coin-toss" game, because the hitrate in this case is dependent on the avg loss/profit ratio...which in this case is more towards 1:1,5 (if you inlcude the b/e trades)
Thank you for the mathematical analysis. I think we have a semantic disagreement. You are looking at the term "coin-toss" as a 50/50 proposition. I am looking at it as a binary input device into a trading "decision." Nevertheless, we can both agree that proper money management, even on a purely random entry, can, over the long haul, yield a net profit.
And thank you for the quote from William Eckhardt. How true, how true.
Dr Bruce Hong,
Interesting insights! I suppose it can be worth a try. I mean, if your system is giving you whips it's best to change something. I think the definition of insanity is doing the same thing and expecting a different result.
Why not use purely random entires as where dealing with purely random markets where every momemt is unique and different from the last.
Great post, thanks very much!
Ryan
I hope you said that in jest, trader ry. The purpose of the coin-toss "game" is to illustrate the importance of money management. This is as opposed to some magic indicator or trade strategy.
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