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Random entry + ATR Trailing Stop

Can a strategy based on a random input  with a suitable output and money management be profitable? Dr Van Tharp in his book Super Trader, said he did the test in 10 markets over a period of 10 years, and says the results were positive in a consistent manner.

“It didn’t make a lot of money and you had to live through some nasty drawdowns, but over the 10 years it made money.” Super Trader p.149.


 
Is it possible to reproduce such results in Forex. This is the subject of today’s article. The test protocol will be as follows:

  • All major pairs. Time Frame = Daily. From 01-01-2004 to 01-01-2012. Initial capital = $ 10,000. Leverage = 1:100.
  • Input (buy or sale) random. All the time in the market (we enter as soon as we are out).
  • Output Traling-stop set at 3xATR (20).
  • If money management: invest 1% of capital at each position. Otherwise, volume = 1 mini lot ($ 10K).

Because of the random nature of the input, the results will be different from one test to another, for the same currency pair and the same period. For this reason, and for the test to be meaningful, I did 10 tests for each currency pair and calculate the mean and standard deviation at the end of the table.

 

1- Test without money management

 

EURUSD GBPUSD USDCHF USDJPY USDCAD AUDUSD NZDUSD
$ -1960 -8506 -569 -2795 -5749 -8320 1979
$ 519 -2791 2089 -1002 -3449 4027 -4470
$ 4195 -5512 3155 -1293 -3232 1117 895
$ -1027 -3970 -613 -1520 -148 -5249 -2963
$ 2728 -1380 1962 -78 560 1349 164
$ -3158 -1388 -2237 821 -586 -9438 -3672
$ -1093 3936 322 1194 591 -1959 -5382
$ -1214 -5877 -438 -1731 -381 -4870 -3745
$ -1246 2631 -354 -4504 -471 -4179 -1053
$ 1798 -4584 4190 2220 1216 -2836 -2249
Moyenne -46 -2744 751 -869 -1165 -3036 -2050 -1308
Ecart-type 2300 3841 2006 1988 2229 4295 2453 2730

 

2- Test with money management (1% of capital)

 

EURUSD GBPUSD USDCHF USDJPY USDCAD AUDUSD NZDUSD
$ -518 148 439 268 -258 196 168
$ -195 51 1215 181 831 -269 -595
$ 471 0 -433 -919 -581 -1232 91
$ 973 -1227 120 -374 -1237 463 -881
$ -67 85 476 300 955 -1243 -1937
$ 749 1028 -666 26 -519 -2067 -1182
$ -136 -963 259 778 -1246 -571 -684
$ 1021 -896 -868 831 395 -2858 -448
$ -140 520 -845 477 103 647 -1584
$ 855 -693 889 569 292 -964 -504
 Moyenne 301 -195 59 214 -127 -790 -756 -185
Ecart-type 572 722 733 534 778 1119 670 733

 

Conclusion

It is clear that the result is negative. Therefore, such a strategy can not be used to trade Forex. Money management has greatly improved the result (-185 ± 733  instead of -1308 ± 2730), as well as the average standard deviation, but not to the point that the strategy becomes usable. However, the use of trailing stop may be interesting to compare and evaluate the different inputs that give advantage compared to a random input. This makes another tool we will use in future articles.

 
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