• Feature: Revisiting Tom Basso: How Important is Your Entry Really? Part II, by Justin Paolini
• Workshops: $700 Early Enrollment Discount Ends Today on Van's Infinite Wealth Workshop!
• Trading Tip: Dividend & Defensive Stock Danger, by D.R. Barton, Jr.
• FREE BOOK!: Trading Beyond the Matrix

Click here to resolve formatting problems

Editor’s Note: In last week’s Part I article "Revisiting Tom Basso: How Important is Your Entry Really?", Justin described the inspiration for testing Tom Basso and Van Tharp’s random entry system that Van wrote about in his Trade your Way... book. Using recent Forex and gold price data, the system still tested profitable but those results then led to additional questions. This week, we rejoin Justin as he describes the results of further research into the effects of more entry randomness and several other changes to the rules.

• Results ended up being much more variable. Equity curves were more of a mix between end profit and end loss compared to Basso’s settings. This is to be expected because we were voluntarily adding randomness to the method.
• The total number of trades was higher. Of course, we were not in the market as long as Basso’s system was and we had tighter stops - so we have more trades. This increased our sample size and added robustness to the results — we think.
• Using a smaller trailing stop than Basso, our drawdowns were smaller yet our average profit was still larger (double) than our average loss. So the trailing stop still worked very much in our favor.
• Strangely, the profit factor was still positive. We wouldn’t expect this if the market was purely random. That result wasn’t just confined to one iteration; it was consistent over all runs we performed.

• Entries were still random in time so the beginning of a trend state does not imply any trade initiation
• Entries were still random in direction, so the model also looked at long entries in downward trends and short entries in upward trends.

• The profit factor was more stable.
• Wins were much higher on average which compensated for a lower hit rate.
• End profit distribution skewed more to the positive side when compared to our runs of Basso’s original random entry rule.

• The final profit was consistently negative which was interesting considering that we were using “random” entries.
• The profit factor was decisively lower than on any other random entry test.
• The average win was no longer consistently larger than the average loss.

• A random entry with a volatility-based trailing stop on average makes money over long enough sample sizes in Forex and commodities because those markets trend for extended periods.
• Random entry positions get chopped up inside a range.
• The Market Type (Trend or Range) is the overriding variable affecting system performance in our tests.

• Focus more on identifying market types and then deploy an appropriate trading system in line with that market type.
• While a purely random entry strategy may be viable on paper, it’s impractical and tough to stomach in real life. You can do much better than random for an entry strategy – and still not spend most of your time refining it.
• Keeping losses small is not enough of a strategy to make money over time since you can easily “die from a thousand paper cuts”.

To define what a game is so that you can see that most games cause you to lose.

To illustrate the elements of the money game so you can begin to awaken to how winners play the game.

To help you understand the domain at which you play the money game.

To awaken you to a new way to play the wealth game. To give you choice with respect to how you play the wealth game in the future.

Workshops

Free Book