How This RANDOM Entry Beat The Market: The Tom Basso Coin Flip Proven and Explained

Have you ever heard people say that a monkey with a dartboard can outperform the market? Although it's been quoted and requoted thousands of times, I believe it came from "A Random Walk Down Wall Street."

Van Tharp, in his book "Trade Your Way To Financial Freedom", outlined an experiment where he selected stocks at random - long and short - and used an ATR Stop with a 1% Risk Model (fixed fractional position sizing).

In this video I use the powerful tool, Amibroker, and 1000 different runs of 15 stock portfolios (Monte Carlo analysis) to see if, and how, this really works. The results will surprise you.

- Dave McLachlan

[montrader]

Tom Basso here: Just was doing some research for a project I'm doing and loved your study. I'm all for NOT using a coin flip to get into a position. The point I was making with the study and you confirmed it, was that your stops and your money management are important to trading success. Other groups have done independent studies of this and created similar slightly positive results with random entry. Nothing anyone would want to trade in the real world, but I feel tells the trader to spend a lot of time on the money management side of the research and perhaps less on the buy/sell engine.

[fractail_]

The first trade is random, what about the others ? Buy the breakup of 3ATR, sell the breakdown of 3ATR, seems to be a non random systematic strategy

[AnotherWell]

Dave, the Gleeful Coder, thank you for an entertaining video with a powerful message. A common mistake made by novice traders is to fixate themselves with the entry rules of a trading system, says Llewelyn James. Rules and strict money management are the key determinants in profitable trading, not highly successful entry signals.

[מוטיבני-סת]

What about execution costs. Buy and hold has the lowest while day trading has the most.

[synthesis]

Hi Dave, thank you for this interesting video! I've done my test runs with MT4 (forex) and, using all the correct parameters and techniques (random entry, atr, fixed fractional position sizing etc.) it's impossible to me to get these results, I won't reach break even no metter how hard i try...

[luciasanguissola]

The profitability of Van Tharp's "coin flip" system was disproven a long time ago. Even he agrees that there isn't a money management system in the world that will turn a negative or neutral EV system into a positive EV system over the course of many many trades. If you don't have an edge, you will not come out ahead in the long run.

[osiekowicz]

we must remember about value of buy and sell price doing simulation . i am doing buy/sell price = close of bar. you are doing buy/sell price = next bar open. it has got influence to results of simulation.

[DANIEL-lsku]

Does anyone know which Market Wizard book does Tom Basso got interviewed with?

[bodhisoha]

You can say "per year" you know...