I researched many trading strategies online, and in books, and most of the strategies said that a good risk management system was possibly more important than the strategy itself. I heard phrases like this: "What separates professional retail traders from novices, Is just good risk management." I eventually got a bit fed up with researching strategies (not because they didn't work, but because the sites made you watch like 15-minute videos before they gave you one sentence of advice) and I started changing my focus to risk management I was pretty happy with what I had found, I even made a comment to someone that "Heck, even flipping a coin with good management could be profitable." Of course, the receiver of that comment said that if doing that was profitable, everyone would do it, and I returned with "Just because it is profitable, doesn't mean it is as/more profitable as a strategy that gives an advantage." My curiosity was piqued. I wanted to find just how profitable would this be. I did the only sensible thing anyone would do. I googled it. I found plenty of comments on trading forums that said that this was "gambling" and not "real trading", but no actual results. I decided to do an experiment to see if this strategy would make you any money at all.

Good risk management means good position sizes, stops, take profits. My question is this: can you flip a coin as a strategy to be profitable trading the stock market? You would do something like this:

  1. Find a random time to enter a trade in a random security;
  2. Flip a coin to decide the direction of the trade you will take;
  3. Use risk management (RR ratio, Volatility adjusting: Stop Losses, Take Profits; Position Sizing) to enter and then exit the trade.

NOTE: I am taking some advice from StackExchange to "share your knowledge, Q&A-style" My answer and the result are the results of my own experiment and will be posted on March 16-18. Feel free to answer with your own tests, insights, or probabilities.

  • 1
    This question could be improved by describing what "flipping a coin" actually means in this context.
    – Philipp
    Mar 12 at 18:13

Flipping a coin with good risk management CAN be profitable with certain assumptions. Assume, for instance, you play a game where you place a bet, flip a coin, and you double your money if you're right, and lose your bet if you're wrong.

One strategy might be to place one bet and quit no matter the result. The expected payoff of this strategy is zero - half the time you lose your bet, half the time you gain it. Another strategy might be to continue with the same bet until you win once. The benefit if you win on the kth trial is (2-k)b and the probability you win on the kth trial is (1/2)^k. The expected benefit of this turns out to be zero as well. Neither of these strategies pay off more than declining to play. Can we do better?

What if we play and double our bet each time? After k losses we'll have lost 2^(k+1) - 1 times our initial bet; the (k+1)th bet will be for 2^(k+1) our initial bet; so eventually, we'll win our initial bet ... if we have enough money to keep betting long enough.

This is sort of an abstract example but illustrates having a plan (and the necessary capital!) to deal with risk makes profits possible.

  • 1
    So it would work with martingale!
    – Mteam888
    Mar 13 at 20:09
  • Yes, but only if you have enough money to flip until you stop.
    – danuker
    May 8 at 14:33

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