Entering the Market – It's Not As Important As You Think
Posted on 02. Jun, 2009 by admin in Forex Education
Entering the Market – It’s Not As Important As You Think
Tom Basso (who is featured in the New Market Wizards) and I were giving a systems workshop, but we were primarily emphasizing the importance of psychology, exits, and position sizing. As a result, someone in the workshop said, “I suppose that means that you could make money with just a random entry?” Tom said he hadn’t thought about it, but he went home and testing out his exits and his position sizing with a random entry system and sure enough, it made money.
I was then fascinated by the idea and decided to prove it for myself. I designed a system that traded 10 commodities over a ten year period. It was always in the market on all ten positions so that when it exited, you needed to reenter long or short, based upon a coin flip. I also added $100 in for slippage and commissions for each position, so I had to overcome a huge amount of costs plus random entry.
Now when you think about the idea of random entry, you are giving up any advantage that your particular edge has. The only way you can possibly make money is to occasionally catch a strong trend and make sure that your losses are not too big and that you practice proper position sizing.
I’ll save the exact details of what I did in the random entry study for the next few tips (when we cover exits and position sizing). But all you need to know right now is that my results agreed with Tom Basso’s results – the method made money consistently. It didn’t make a lot of money and you had to live through some nasty drawdowns. But overall, over the ten years, it made money.
So why do people make all the fuss about entry? I actually touched upon it last week when talking about setups. People are brainwashed to think investment or trading success is all about picking the right stock. It’s not!
Let me tell you about my first stock that I bought when I was 16. I found the stock that had the highest per share earning growth the prior year according to the 1961 review of the year by Fortune Magazine. Thus, there was some research involved in my decision, but no particular entry. Once I discovered it, I bought 100 shares for $800. That was my entry. I then watched it go up to $20 per share and then go back down again. Eventually, it went to zero and my understanding is that a lot of people go through this same sort of experience.
Now you could say, I bought the wrong stock. I could have bought Microsoft or Berkshire Hathaway in their infancy and made a fortune with my $800. But for every stock like that, there are a 1000 that eventually disappear – including many Fortune 500 companies. But what I did is basically ignore every important rule that I now teach people simply because I thought that to be successful you just had to pick the right stock. I could have had a simple 25% trailing stock. In that case, my initial risk would have been $200 (a 25% drop). When the stock reached $20, a 25% trailing stop would have had me sell at $15. I would have made $700 for a 3.5R profit. I didn’t pick the wrong stock. I just didn’t understand the rules for making money.
Let me repeat that statement. Success is not about picking the right stock. Of the original 30 Dow Jones Industrials, only one remains today and that is General Electric. Most were dropped from the Index, went bankrupt, or were absorbed by some other company. And that eventually happens to most companies. Picking the right stock and holding it until you die is NOT the magic formula for success.
Yet today, many, many people have this sort of bias. They are looking to pick the right stock and figure out how/when to buy it.
