How This Random Entry Beat The Market (The Tom Basso Coin Flip Proven & Explained)

The Random Entry

Have you ever heard that “Monkies throwing darts at a dart board could out perform most fund managers”?  While it was first declared in the book “A Random Walk Down Wall Street”, what if it was really true?  And has anyone actually tested or validated it?

A few weeks ago, a great quote came across my Twitter feed by the excellent Larry Tentarelli:

“There is no Holy Grail of entry signals.  A profitable system can be created using random entries with excellent money management and position sizing.”

Tom Basso Coin Flip

Larry is a truly stand-up guy and I highly recommend following him on Twitter.  Larry went on to say to “Search for the Tom Basso Coin Flip”.  I did, and it was there that I found the rules to the system he was talking about.

Tom Basso Coin Flip 2

It was on Forex Factory’s forum, and originally found by Van Tharp in Trade Your Way to Financial Freedom.  Here are the rules:

  • Either Buy on a Random Entry, or Short on a Random entry
  • Sell on a Trailing Stop Loss, 3 times the Average True Range of the last 10 days.
  • Use 1 percent risk per trade (between entry and stop loss, otherwise known as fixed fractional position sizing).

I personally used 15 positions at a time also, as I believe more than this at a time gets hard to manage in real life.  I then performed 3 simulations of 1000 Random portfolios each – more than 15,000 signals for each one, and otherwise known as Monte Carlo testing.

The simulations were:

  • Normal Random entry with ATR stop loss, 15 positions at a time
  • Two times leverage with ATR Stop loss, 15 positions at a time
  • Two times leverage and 1% Risk Model with ATR Stop Loss, 15 positions at a time

And our benchmark was a random portfolio of 15 stocks but Buy and Hold only.

Check out the video for the full detail!

Random Entry with ATR Stop and 2x Leverage:

The Histogram is a neat Normal Distribution, and the Scatter Plot is more “together” than the buy and hold.  The Average Annual return did significantly beat buy and hold at over 20%, however the maximum drawdown is hideous at nearly 90% in a lot of cases.  This would be almost impossible to trade form that perspective.

2000-2015_All Ords_Tom BassoCF

Random Entry Buy and Hold Return (our benchmark):

The Average annual return came from the two peaks in the histogram of our Monte Carlo simulation, known as a binomial distribution, and definitely not ideal for trading.  Most common returns were 6% and 13%.  The Scatter Plot of our Max Drawdown versus average annual returns is also extremely, well, scattered, again making this a “not ideal” candidate to physically trade.

2000-2015_All Ords_Buy and hold

Happy trending!

– Dave McLachlan

More Market Research Videos:

  1. Stock Market Research: The REAL Effect of “Buy and Hold”
  2. This Simple Indicator SMASHES “Buy and Hold” Returns!
  3. More Stats on the Indicator that Beats Buy and Hold Returns
  4. New Mean Reversion Trading System (Stocks Over 50 day MA) Tested in Amibroker
  5. How This Random Entry Beat The Market (The Tom Basso Coin Flip Proven & Explained)
  6. Does the “Golden Cross” Outperform Buy and Hold? Market Timing, Real Results
  7. The Trading System from “Reminiscences of a Stock Operator”, Tested Over 116 Years
  8. The Three Billion Dollar Day Trading System Revealed and Tested

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January 10, 2016  Tags: , , , , , , ,   Posted in: Stock Market Research

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