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Yes, it would be quite interesting to test different exit strategies to see if any produce a negative expectancy in a random entry system which would be a cause to eliminate them.
Can you help answer these questions from other members on NexusFi?
A casino has an edge and we all agree on that. Regardless of when, how and where you play, they will take the player's money. 10 years and 20 years from now, they will win because they truly have an edge. Once in a while, there is a large winner, they take a small loss for an hour, and then they continue to win indefinitely. They truly have the odds in their favor. An edge in our case is a mathematical definition where the odds are in one’s favor.
When we trade, and have positive expectancy does that give us an edge? Does our strategy regardless of whether we use it now, tomorrow and in 20 years will continue to win? Sadly we know the reality of that. Therefore we do not have an edge.
I propose to replace the word edge with the word anomaly. Therefore, when you build a strategy, you need to define what anomaly you are exploiting. If you can define it verbally, you have an advantage over those who can’t.
The basis of this definition will allow you to examine all the necessary components when you back test. This will also allow you to examine the appropriate risk management with such a strategy.
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Alright so I ran the random entry system on 6E with 5 minute bars like i had last time. 1-1-2003 to present day. I used the same 15-15 hard stop and target as before to keep consistency. No commissions/slippage.
Break even after 8 ticks of profit (15-15 stop target)
trailing 15 ticks (15-15 stop target)
These strategies in general affect winrate, Reward Risk Ratios, and holding time in trades. But in general still again, trade management converges to 0.
Looking at the Break Even strategy. Break evens here I believe are not counted as winners no losers. So in the end you get a 1:1 Reward Risk ratio. But your winrate is in the toilet compared to a 1:1 strategy.
The trailing stop strategy does something interesting that may be beneficial though not net profitable in any way. is the increase in the ratio of winners to losers. So if your in the combine for example, trailing your stop is a guaranteed way to nail at least 1 of the stats. This trailing stop was 15 ticks on a 15 tick stop, so it never actually started to lock in profits.
But I think conceptually these exercises continue to show us that at the end of the day, trade management doesn't mean jack, outside of psychology and preference.
I have decided to compare on the same spreadsheet my experiments. This time using a 1 minute chart on 6E. the standard 15 ticks remains the same.
I tested the following.
1:1
2:1
1:1 and 2:1 scaling out
1:1 and 2:1 scaling out with 15 tick trailing on entire position
1:1 with 8 tick Break even
1:1 and 2:1 scale out with BE after 1st target (15 ticks)
1:1 Scale IN after +8 tick profit
Comparison spread sheet
Notice the expectancy in ticks is fractions of a tick across the board.
the only difference is win rate and ratio of winners to losers. That is all trade management changes.
I’m new to the forum. I’d like to add a wrinkle to the random entry discussion.
The theory is to trade successfully you cut your losses short and let your winners run. The system you have been testing limits your winners.
If you enter a trade with a trailing stop and don’t have a target you will catch a big move every so often. This in theory will increase your average win size.
here is the results with the 15 tick trailing no profit target.
It is actually by far the worst performer. With a negative expectancy >1. I know its not much more than the rest but still bad. For that you get a 1.665 RR and 34.34 % win rate. you would do better doing a straight AIAO 2:1. You give up 1.34% winrate but gain .32 RR.
I do have one question. If the stop is 15 ticks and you are not allowing for slippage why is there such a difference in the largest losing trade. If you are stopped out at 15 ticks shouldn’t all systems have the same largest losing trade?
