Random Entry Trading System: Does it Work? // Ep. 17

In This Episode

• The guy who uses a 1 pip stop loss
• Why traders won't listen to data, even if it's super profitable
• You might want to test random trading because it has benefits

Random Entry Trading Systems

Do random entry trading strategies work?

Just like any other trading strategy, it depends on your personality. In this conversation, we dig into beliefs and why they matter so much.

Nowhere is the more evident than in random entry systems.

Many traders want to be in control and “get their hands dirty,” But would an automated, random entry system to just as well?

Maybe, maybe not.

Also, hear about Hugh's profitable random entry strategy that was profitable in testing.

Read the Transcript:

Hugh: Hi, Walter. I know you have some experience talking to Darren with this; once talked about random entries. What are your thoughts on the psychology behind random entries? Just entering anywhere in the market, putting in a stop loss or whatever and then take profit and then just letting it reap.

Walter: So I got two main thoughts. My first thought is that this is an exercise I encourage people to do. People listening to this or watching this podcast, I would say try it out because it is a really good way to highlight the importance of your exit rules. Which a lot of people do not focus on, that’s number one.

Number two is, that’s really important. It’s a great lesson to do that. The other thing is it’s interesting that you would think really sort of data-driven logical traders. Who are like programmers and have that sort of a background.

It is interesting to me that many of them won’t apply a strategy if it does not make sense. So this kind of speaks to what you are saying. There are software out there that you can get. You feed all your data into it and it will come with a strategy.

It will say, “Everyday, at three fifteen PM you need to buy the Euro against the Dollar” or something like that. Some sort of a data-driven rule and a lot of traders they’ll go, “Why? It doesn’t make sense.” They won’t trade it. Even though the data is looking at them in the face and says, “This is a profitable strategy”.

I think that you kind of have to decide as a trader. Are you going to be hands off and let the data tell you what to do? In this instance, what you’re talking about is, what if you had a strategy where it's a random entry? And you just had a really kind of cool trailing exit that took advantage of the occasions when you are right and so, would you trade that?

For most traders, the answer is no. It is the same reason why a lot of traders want to be discretionary and want to kind of get their hands dirty when they enter a trade. I am just as guilty as anyone.

So I think it kind of gets at the core this idea of why you need to have logical entry rules. It kind of gets at the core of what you believe as a trader. Is it that you are making the trade? Like, you are making this happen or is it that there’s just randomness in the market? Occasionally these things pop up that’s why buying the Euro at three-fifteen everyday sort of thing works.

Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.

At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.

So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.

Walter: So, it is really up to you and most traders can’t do that. Most traders won’t be able to take random entries. It’s a very unusual thing that you run into somebody that can do that. I’ve met a few. They are usually like programmer types. They are like this is what it shows; this is what we find; this is what I am going to do.

You could definitely do it. All the tools are there now. This wasn’t the case when I started doing neural networks in 2004 or 2005. I was using neural network software that was not trading-related really.

So, it was kind of clunky but now, today there’s all these really cool softwares that you can use. Maybe I’ll put some links in the show notes for people who are interested. It literally will spit out a strategy and say, “Based on your data, this would work”.

Now, that does not mean that it’s going to be profitable in the future. It’s just the first step for a lot of these people who want to use machine learning in this sort of advance in vogue algorithms that’s kind of taking over the world.

Hugh: It’s interesting you mentioned that because I coded up a simple EA. It was just taking like a twenty pip stop loss and a two hundred pip take profit. I just code it up one side to see buy all the time or sell all the time.The system was profitable.

It was marginal but you just let it reap and it weld money in. I never went back to it because like you said, I don’t know if I could really get my head around trading that with real money. Maybe at some point, I’ll revisit it because just a simple idea like that, I’m sure could be optimized a little bit more.

Walter: I could see the wheels turning in people’s head sort of listening to you say that. What if I use moving averages or MACD to give me a direction then I would just turn it on. I could see people definitely doing that. It makes sense.

I’ve heard about a guy. I don’t know if it’s true. I don’t know the guy but I’ve heard about the guy who was doing a similar thing where you would have like a one pip stop and he’s stopped out all the time and then he would occasionally like a five hundred pip win rate. Make five hundred dollar or whatever. I don’t know if that is true.

I do know there is a guy that trades twenty to one and he has an eight percent win rate. Matthew in London. So, that’s kind of cool that there are people doing it. He said, what he was saying was that — I mean, I think there’s some logic behind it. I don’t think it's a random entry. He didn’t really tell me. It was interesting. He was saying — he thought he had to have it automated because he wouldn’t like psychologically he wouldn’t be able to take ninety-two percent losses.

Hugh: I think that was the biggest issue for me. There’s so many losses in a row and in live trading I don’t know if I can handle that.

Walter: Of course.

Hugh: If you automate it, it’d be alright.

Walter: Exactly.

Hugh: Cool. Thanks, Walter.

Walter: See you.

Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.

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