A while back I wanted to know if it is possible to make profits by random entries on the Forex market.
This type of experiment has been tried by other traders, but I wanted to know for myself.
I conducted this experiment with the following currency pairs: EUR/USD, GBP/USD, AUD/USD, NZD/USD, EUR/JPY, CHF/JPY, and GBP/CHF.
The premise behind the experiment was that entry is unimportant. Most traders trade under the assumption that they make money based on their analysis (mostly technical analysis only). But is that the case?
It does not occur to them that other factors may determine whether they make money or not.
I was thinking of factors like risk-reward ratio, strict money management and finally exits.
I traded a pure "set and forget system." This means I was not getting involved in current trades or changing anything. I did not look at charts or any other data, so I just traded based on "chance." I also let the trade run over the weekend.
Each trade got a stop loss (50 pips) on the way and a take profit (100 pips). Either the trade ran into the stop or into the take profit.
Due to these rules the RRR for each trade was 1/2 (I do not count the spread, although it plays a role in the long run).
What did my random system look like?
1) I traded two currency pairs at the same time. If a pair were stopped out or ran into profit, a new trade could be started.
2) The choice of the currency pair was done according to the "lottery principle." The names of the pairs were on a slip of paper that I drew from a pot with my eyes closed. (I had some fun with that!)
3) Long or short? The decision was made via the “toss,” just like in soccer. I tossed a coin. On tails I went long, on heads I went short.
4) Time of the trade opening? Purely by chance. I looked in the account 1 to 2 times a day.
I had $10,000 in the account. After four weeks of "trading" there was a small gain of $100. After six weeks, $150 profit.
May I point out that this is 1% per month....
Now what was the reason for the profit?
To be honest, I do not know.
My guess was that it was thanks to the consistent risk-reward ratio (50-100). But I am not sure about that.
Nonetheless, I do not think you will make a profit in the long run with a purely random system. I think that at some point the hit rate will settle at 33.33%, right at the break-even point. This would mean that the profits and the losses will neutralize each other.
Still, I find this random system interesting because with it you first work on the robustness of the system before even thinking about which currency pair to buy or sell.
What does it take to make this system even more profitable?
I think just a little optimization.
And the question is whether this can succeed if you make entries based on technical analysis rather than randomness.
Here are some suggestions:
- Build in a time factor. Close the trade after X number of days. Or start moving the stop towards the entry after X number of days.
- Position size: Increase the position when the system makes money. Reduce the position in drawdown phases.
He traded for a hedge fund and then went on his own. He specializes in scalping and fast day trading. His scalping book "Scalping Is Fun!" is an international bestseller and has been sold more than 30.000 times. His books have been translated into 11 languages.
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