Dewey McG » Sun Jun 29, 2014 7:02 am wrote:Let's see if I can explain this. You would only be right if everything remained static, i.e. the market always gave you a the same probability of hitting your TP and that the odds of hitting TP on subsequent ALR trades remained at 25%.
That's right. That's what I simulated. I don't know how to simulate the actual market behavior, short of writing a system and backtesting it with actual market data on a reliable backtest platform. (And we all know the reputation of Empty4's backtester...)
Maybe I'll write a Tradestation system to test it. I would probably need to use a fairly random entry for the initial trade. I don't know how to get 60% on a 3:1 reward:risk trade. (If I could do that, I wouldn't worry about ALR!! That has an expectancy of 0.60*3-0.40*1 = 1.40, meaning on average you win 1.4x your risk on EVERY TRADE. Risk 2% and you'd win 2.8% per trade, on average. The Kelly value is 0.46 so you could very safely risk 5% per trade, averaging 1.4*5=7% profit per trade. Who needs ALR!?)
Maybe watch the pair and look for a period of decreased volatility, possibly followed by increasing volatility, and enter then. Volatility mean-reverts so if you've had a period of low volatility, it's very likely to increase. That's the perfect time to enter a trade that thrives on volatility. (Though I'm not convinced this one does! See below.)
If I use a 150 pip tp and 50 pip ALR then all I need is for the market to eventually move at least 150-200 pips either way within 10 turns and I MAKE A PROFIT.
Right. If you can avoid hitting the 10th turn and bailing, you're golden. Of course the same is true for a normal Martingale.
Here's a sample progression that increases the size on each turn, trades profitably up to 7 turns, and even with a 60% initial win rate, you still hit the 12th-turn bailout 2.3% of the time. That ALR works just fine if you don't hit the bailout, but once every 43 trades you WILL, if the market continues to hand you 25% wins for the 3:1 trade. 60% of the time you win 60, but every 43 trades you lose 720... and every 20 trades you lose about $100-$250. The net result is the same (before costs) as if you just took the loss in the first place.
ALR9.gif
If we use higher volatility pairs the odds of going 10 turns without a TP become far less than 3%.
I don't believe that. Higher volatility works both ways. Without some kind of trading edge (like the 60% on the first trade), you're more likely to hit the TP **AND** you're more likely to hit the SL.
On random entries (which is what you'll get if you just reverse when you hit the SL) your win rate will still be about 25% with 3:1 R:R, and the chances of hitting the final bail-out level are just about the same as at lower volatility. No free lunch. |
