Speculative attacks on markets have been thwarted repeatedly by the various interventions of governm...
Making Heads or Tails Out of Trading
09/26/2013 11:00 am EST
Your host Rob Booker catches up with his old friend Chris Mystic, a veteran of the currency market who decided to start trading randomly and entered a contest against other traders! The premise: Chris works for Traders Laboratory, and in an attempt to keep the subscribers entertained, he decided to conduct an experiment for one month: At the New York open, he’d flip a coin and if it was heads, he’d go long on the euro dollar, and if it was tails, he would go short on the euro dollar. He’d flip the coin 30 minutes before actually taking the trade. And he set some rules, such as it would be a 1:1 risk-to-reward, and 20 pips take profit, 20 pips stop-loss, and if the trade hasn’t closed by 5 pm, then he’d close it manually. And as mentioned above, Chris entered this random trading account into a trading contest with some intriguing results!
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Chris Mystic: Hola, Roberto.
Rob Booker: What's going on, man? Long time, no talk.
Chris Mystic: Yeah, it's been awhile, it's been awhile.
Rob Booker: Well, you wrote me the other day about a thread that you started on Traders Laboratory.
Chris Mystic: Right.
Rob Booker: Great web site about random trading, and you were thinking about doing something that I think is shockingly interesting, even though it's so simple, which is, well, you tell me about it. You have this idea about something that you would do every trading day at the exact same time.
Chris Mystic: Yeah. Well, what it was, well, you know, I work for this web site, Traders Laboratory, and you try to keep the subscribers entertained, I guess, you could say. I'm sort of like a forum police, and you have to try to be a little entertaining, you know, keep everybody engaged and interested, and was just like running out of, because I've been doing this for awhile and I was running out of ideas; what can I do, what do I do today, and stuff like that.
So I just had this idea, let's do an experiment where for one month every trading day, morning, at the New York open, 9:30 my time, I would flip a coin and if it was heads I would go long on the euro-dollar, and if it was tails I would go short on the euro dollar, and I don't usually trade the euro-dollar as I usually trade the pound to yen, but I figured more people would relate. It's traded more and more; people would relate to the euro-dollar, and I set down some strict rules about, it was one to one risk to reward, 20 pips take profit, 20 pip stop loss. If the trade hasn't closed by 5 pm, the trade gets closed manually, and one of the other members on the site was also starting our monthly trading contest, and I won the contest by flipping a coin.
Rob Booker: So wait a minute, you entered the trading account; you entered the trading account that you were doing the random trading in?
Chris Mystic: Yes.
Rob Booker: …into a trading contest.
Chris Mystic: Yes, that's correct.
Rob Booker: That's like a reality show on TV about a restaurant, and the restaurant wins the contest that has been serving a different style of food every night.
Chris Mystic: Exactly, watered down chianti or something like that.
Rob Booker: Watered down chianti. I wouldn't call random trading watered down chianti, but I want, I do want you to explain to me how it is that you think that a randomly coin flipped trading account could beat...
Chris Mystic: I believe, and obviously it caught my attention because it goes against everything I ever thought possible. So anyway, the account finished up 4.87% for the month.
NEXT PAGE: Chris’ Crazy Trading System|pagebreak|
Rob Booker: Okay, that's an extraordinarily respectable.
Chris Mystic: That's a great, yeah, I'd be happy with that return every month, and it won the contest with that amount, and I think it has to be attributed to the fact of just having strict rules and not deviating from, you take profits, don't get greedy, even if you think you know it's going to be 40 or 50 pips; the rule to take profit is 20 pips, so you take your 20 pips, and if it goes against you 20 pips, you take the loss, and I think that someone could start trading like this and say, you know, yeah I'm currency trading. I'm not making money as a currency trader but I am a trading, I am a currency trader, and I think doing this you would never really make money but by the same token you would never blow up your account, and never really lose a lot of money I don't think.
Rob Booker: All right, I have a thousand questions for you. How long have you been trading, Chris? I already know this, but our listeners don't.
Chris Mystic: Oh, what is it, like seven years.
Rob Booker: Okay, seven years, so seven years into trading, a veteran of the currency markets who I've known for a long time who's had varying degrees of success, I mean great success and then moderate success, decides some time ago, like a month ago at the beginning of August, to start trading randomly in a contest against other traders.
Chris Mystic: Right.
Rob Booker: So first of all, that's the most insane thing I've ever heard. Second of all, you come on the podcast listened to by thousands of traders and you suggest that someone who has not been having the kind of success that they dreamed of having when they first started trading might consider randomly trading as their system? Jason, in the history…
Chris Mystic: Just like to tread water.
Rob Booker: …of podcast episodes that we've done, Jason, this has got to be, this has got to be one of the simplest yet craziest pieces of advice that we've heard so far.
Jason Pyles: I love it, yes.
Rob Booker: It's along the lines of Greg K. telling us that he could define the future in trade.
Jason Pyles: Yeah, we're going to get some comments.
Chris Mystic: If you're feeling a little bit burnt out and you need like a mental break, and you just want to tread water for awhile, you can do this and you're not going to make a lot of money and you're not going to lose a lot of money.
I imagine maybe the next month I would have lost 5%, but either way I don't think you're going to make or lose a lot of money and it may just open your eyes to a few things. First of all, like the time, 9:30, I never used to trade at that time. I used to trade at the London session, and at 9:30, especially like if it's a big news day or something like that, it's going to pop like one way or the other, so if you could just get yourself, so you're starting with 50% odds, if you could tweak one little thing that will give you like a 2% advantage, you should make money with this.
Rob Booker: This brings up a good point, and like I said I have a thousand questions. What time do you flip the coin?
Chris Mystic: I used to flip the coin at 9:00 am.
Rob Booker: So you'd flip the coin at 9:00 am.
Chris Mystic: Yeah, I didn't want to wait until the last minute because I have to post all of this stuff too while I'm…
Rob Booker: Yeah, right, okay. So let's turn this into a trading system together, you and I, old friends.
Chris Mystic: Okay.
NEXT PAGE: More Details of the Crazy Trading System|pagebreak|
Rob Booker: Let's turn this into the dumbest trading system ever made that is also maybe smarter than trying hard, right?
Chris Mystic: Yeah.
Rob Booker: Trying hard doesn't work. I think we, I think you and I could both agree that the successes that we've had in our lives…
Chris Mystic: Sometimes you try too hard.
Rob Booker: Not attributable to the times when we were banging our heads against the wall, but rather when we gave in to something that worked without trying so hard, so you could flip the coin maybe at 9:27 Eastern time every day.
Chris Mystic: Yes.
Rob Booker: Euro against the US dollar, but I think you could probably do this with the S&P E-minis. I think you could probably also do this with a weekly options trade on Monday morning. This is sounding worse and worse as I even speak.
Chris Mystic: Yeah, but you could probably do it with just about anything; anything where there's one side against the other. Obviously you couldn't do it for a horse race because there are nine horses running.
Rob Booker: You leave the trade in, what, like all day until it's closed? What if it doesn't go 20 pips? I know that's practically impossible, but you would leave it open until the next day?
Chris Mystic: No, no, no, I would close the trade at 5:00 o'clock everyday. I had to close the trade twice manually.
Rob Booker: Oh, really.
Chris Mystic: Yes.
Rob Booker: So twice it did not move 20.
Chris Mystic: Twice it did not move 20 in either direction. One day it was up 18 pips and another day it was down 6 pips.
Rob Booker: Okay, let's talk about two other things that are, and Jason I'm prepared for any questions you want to ask as well.
Jason Pyles: Okay.
Rob Booker: Because I'm sure that you've got to have some questions about this. What's the philosophical underpinnings of this? I always want to ask, why does something like this, what's the force at work here, Chris? Is the market random or is random trading just simply better than most people who think that by drawing lines on their charts they're going to outwit the rest of the market? What is, what's the premise here?
Chris Mystic: Gee, that's a good question.
Rob Booker: Or the lesson that comes from this. Is the lesson that comes from this maybe something that goes back to what you said at the beginning of the podcast, that the simple fact that you had rules and you stuck to them means that you're going to do better than most people.
Chris Mystic: I think that would probably be the biggest take-away from this whole thing. That by just having some kind of plan, I mean, a plan is no good if you don't stick to it also, you know. Maybe since I wasn't really financially motivated, I had no interest, I had no dog in the fight as they say or whatever.
Rob Booker: Right.
Chris Mystic: How this came out.
Rob Booker: You strike me as the kind of person that lives a life like that too, Chris, and I mean that as a compliment, that you don't have a lot of dogs in a lot of fights. You pretty much, you pretty much, you don't have a lot of enemies, you don't take sides, you aren't interested in getting wrapped up in drama. You like to keep your life simple and straightforward. You like nice things. You've bought some nice things that you've showed me pictures of when you've made money in your trading account. So I mean, I'm not to say you're not a worldly or material person, but you don't really, it doesn't really bother you that this kind of trading takes the power out of your hands and puts it in the hands of the coin.
NEXT PAGE: Designing a Mechanical Trading System|pagebreak|
Chris Mystic: Oh, no, no, not at all, no, not at all. Not at all.
Rob Booker: There's a book about this I read in 2007, Dice Man, and it's a book about a guy, it was written in the late 1960s, and it's about a guy who literally lives his life by flipping a coin. Woman down the hall invites him to come in and cheat on his wife, and he flips a coin and the coin comes up heads, so he goes in and cheats on his wife or whatever, and he lives his life by the flip of a coin, for those of you that are interested in comics, of course you'll remember Harvey Dent or Two-Face from the Batman comics that left everything up to a coin, and now we have Chris Mystic, my good friend of years and years and years suggesting that the simple process of following rules, any rules, could be the basis for a trading system. Why couldn't a trader then, Chris, after a month begin to identify some kind of situation wherein they could go for one extra pip, one extra point beyond 20 on the winners?
Chris Mystic: Exactly. Well, that's what I meant when I said if you could find something and just tweak this like 2% in your favor, so instead of being 50/50, having a 50/50 chance you have a 52% chance. I mean, or even like a 5% tweak in your favor, it would be totally awesome.
Rob Booker: Yeah, and 5% is maybe even asking for more than necessary, right, because you made 4%.
Chris Mystic: Yeah, I said 2%, yeah, sure.
Rob Booker: What was your win to loss ratio? Do you have your percentages?
Chris Mystic: No, I did it with OANDA and they don't give you that kind of breakdown, and you know like I say I started this sort of like tongue in cheek. So I didn't put on my white lab coat. And again you know me, I've never been the backtester that you are. You're a backtester who also happens to trade and my backtesting has always been found wanting, I guess, we could say to put it nicely.
Rob Booker: Well, it's reasonably easy to reverse engineer what your win percentage was because you had the same profit target and the same stop loss and only a couple of times did you close it with anything different, so essentially you got lucky in August and your flip of the coin won more often than it lost, so we could expect that somewhere down the road you're going to have a reversal of that fortune.
Chris Mystic: Yeah.
Rob Booker: That makes absolute sense, so it goes to 100% says, listen, I would be interested in a robot that did this at 9:29 am Eastern time everyday, flipped a coin inside of an algorithm or whatever, came up with a buy or sell, and then a 20-pip target and a 20-pip stop loss, but only put the stop loss in, not the profit target, and then judging by the speed with which it approaches the 20-pip target leaves it open for let's just say 2 pips more, so you have a slightly larger profit target than you do stop loss.
Chris Mystic: Well, see, first of all, though, if you're doing this with real money, that's going to have an outcome on it if you sit there and watch the trade all day, you know. Well, if you're sitting and watching the trade and it's up 12 pips and you're working with real money, well you will, when you make a rule you really stick by your rules. I remember in the old days, your profit target would be 350 pips away and you would be 340 pips in profit and you wouldn't close the trade, but not everybody is like that, Rob. I think if you're doing this with real money, and if you decide you're going to sit down and watch it all day, you're going to jump in and start meddling with it and you're going to start short changing yourself by taking your profit too soon.
NEXT PAGE: Tweaks to Simulate Randomness|pagebreak|
Chris Mystic: In a couple days I noticed there's like that overlap until like London closes, you could make your 20 pips say by 11:30, and then after that when London closes it might drift down, and by 5:00 o'clock let's say if you left it open, an open-ended take profit, at 11:30, you could have been up 22 pips but by 4:00 o'clock in the afternoon you're only up 6 pips or 10 pips or whatever. So I like the fact of dealing with a firm take profit. Make it firm on each end, winning or losing.
Rob Booker: What I was saying is you could program something, to get, see, I don't want to put the trying to get the edge in the hands of the traders that you beat in the contest. What I was saying is that if you could measure the speed with which it was moving when it was in your favor, then you could say that if it covers more than x number of points of ground within this amount of time, that it's more likely than not to go just one pip further or two points further, which is 10%, so you boost your profit by 10% under a mechanical condition and you just let the computer figure that out, otherwise.
Chris Mystic: Yeah, well, I guess you could start using maybe a strength indicator or a momentum indicator or something.
Rob Booker: Yeah, right, or something.
Chris Mystic: And if your momentum is at or above x level by two hours, then you can remove the take profit and just let it run.
Rob Booker: Yeah, and then again we're trying to outsmart the market, so maybe if it's up 10 points we flip a coin again and if the coin comes up heads we go for 30. And if it's down 10, we flip the coin again.
Chris Mystic: Exactly, because we're talking about if we could just tweak it 2% in our favor, so maybe that would be one of the little things we could do to give it that little tweak that we need to make it consistently profitable.
Rob Booker: I wonder if anyone listening to the podcast could program that for MetaTrader.
Chris Mystic: Well, I'm sure somebody could, I don't know.
Jason Pyles: John.
Rob Booker: I was almost listening for someone to respond, and then I realize that it's being recorded.
Jason Pyles: Maybe John Verbrugge.
Rob Booker: Jason, what do you think about this?
Jason Pyles: Well, I have two things. Number one, it almost makes sense in a way, because and Rob I think you were touching on this a little bit. If the things that happen in the market, there are so many variables, so many elements that make it to a degree somewhat random, somewhat, then it almost would make sense that a random coin toss would help you align with the universe of the market, so that's one thing. That makes sense to me, and then the other thing is, well, that was the only thing. I thought I had another thing but it was similar to my first point.
Chris Mystic: Something else I noticed, Rob, when I was entering the trades is that several times when I entered the trade, the entry price was 132.40 something, like 132.42, 132.44, so after a few days of that, I realized that we were in a range-bound market. We weren't in a market that was trending a big deal one way or the other. And I noticed that almost immediately that we were in a range-bound market because it seemed as if everyday I was opening the trade, and it was within 10 pips of the previous day's trade. So that led me to believe that this might, I haven't tested it on anything else so I can't say for sure, but this might work better in a range-bound market.
NEXT PAGE: Rob’s Challenge to Programmers|pagebreak|
Rob Booker: Ah, yeah, well that makes sense to me, then it doesn't have the, you're not facing the chance that it's going to quickly move too much too soon.
Chris Mystic: If you're in an incredibly bullish market, everyday you flip a tails you're going to lose basically and then after a while you're going to say oh, the heck with this, and you're going to give it up.
Rob Booker: Well, that's better, Chris, than a lot of traders out there who in a bullish market just sell everyday but they didn't flip a coin.
Chris Mystic: That's true too.
Rob Booker: At least a coin had a chance of buying, right.
Chris Mystic: I resemble that remark.
Rob Booker: I do, too, I'm a counter-trend trader. For all the fanfare that we make about our new favorite trading system that took us six months to build, it is hard to beat old-fashioned random trading that doesn't get emotionally tied to one side or the other. Where can people find this thread? Can they go to TradersLaboratory.com and type in what? Insanity? Random trading? What could they do?
Chris Mystic: The name of the thread was called, let's try an experiment.
Rob Booker: And Chris, do you have anything you want to plug? Do you have an email address you want to give out to people that want to pester you or a Twitter feed that you, Facebook friend, what do you have out there?
Chris Mystic: Well, nothing I really want to plug, but if someone wants to, I always like talking to other traders, so my email account is MysticForex@TradersLaboratory.com, and if they want to send me an email, ask me questions or tell me about something that they're doing, I've always enjoyed talking to other traders and see what they're doing and what they're not doing. No man is an island, you have to interact with other people to continue.
Rob Booker: Absolutely. Are you going to, will you continue the experiment?
Chris Mystic: Not at this time. Well, then you don't, maybe I'll continue it, well I'm going away for a few weeks next month, when I come back I think I'll continue it but I'm not going to put it on the web site because I think they may be tired of seeing the same thing over again, but I'll just do it privately and see what kind of results I can get for a second month.
Rob Booker: Well, if someone out there can build a robot on it, I'll put a thousand dollars, I might even put more than that in it, and run that on my FX book account, so if you're out there and you're a programmer for MetaTrader and you're willing to donate some services to do that, and pretty much waste your time, we'll have you on the podcast, we'll talk about the programming, and it's not necessarily really easy to program for MetaTrader a random entry on a trade, so I'd be interested to see if anybody out there is willing to take up the challenge and get a little bit of notoriety for it, and maybe we will run that account for charity or give the money to, I don't know, a random person on the street, that sounds like the…
Chris Mystic: Just flip a coin.
Rob Booker: Flip a coin.
Chris Mystic: Pull a name out of a hat, yeah.
Rob Booker: Pull a name out of a hat. Jason, that's been one, this has been one of the most enjoyable conversations I've had for a long time. And Chris, I appreciate you being on the show, it's always good to stay in touch with you.
Chris Mystic: Always great to talk to you, Rob.