Money management & Martingale

[maildigger]

Has anyone ever thought about a Martingale (=if you lose you double your position the next trade) money management?

In the long run it seems a bad idea due to the possibility of a losing streak and you can't keep adding contracts.

What if you combined it with a strict daily money management? Let's assume the total maximum loss you will take is X and your daily goal is 2X or more.

[brownsfan019]

It might work if you impose other rules to it, but then the question becomes - are you even performing a martingale strategy?

It's something I've thought about before as well and in the end, it was a slippery slope (for me).

There's only one way to find out - do some backtesting and/or live testing and see how it goes. Keep detailed records. It could be an easy analysis if you do it on paper, while trading the way you currently do. See where you are at the end of the day.

[torero]

Ask the traders who pyramiding up or down while in winning positions or losing positions and read Market Wizards how these guys become rich. It was pyramiding while their positions were winning, not losing. Evidence is proven everyday that Martingale don't work. I think the Dot Bomb Bubble years were an extreme major example but no one can last forever fighting the market when proven wrong (even the Bank of England couldn't do it vs Market and Soros).

[notouch]

Nick Leeson traded using Martingale money management and look what happened to him. I strongly recommend watching the movie Rogue Trader if you're not aware of all the facts.

[waveslider]

There is a program called "market system analyzer" that can test all of these different money management techniques. I think they have a free one month trial.

My opinion is that you add on one contract per trade after reaching $XX account value.

Doubling position size almost always seems like a bad idea, so does pyramiding as you win if not done properly.

In pyramiding your entry in the same position as you win you may end up with an inverted pyramid as you raise your average entry price. Subsequent entries should always be smaller in size.

The trick to money management is to take a lot of trades, and manage them according to your individual approach. I see there being two approaches:

You are either a high probability trader, or a trader who has larger average wins than average losers (high profit factor).

A high probability trader wants to keep his maximum losers as low as possible. As long as the losers are not too big and the probability is high enough, the account will remain near its profit peak.

High probability trading normally means your losers are larger than your winners. Your winners are small, but consistent.

A high profit factor trader can have a low probability, but still be profitable as the size of the winners take care of losses. A high profitability trader has smaller losses and larger winners.

The high profit factor trader may have more extended draw-down periods and more time in the market (exposure).

So decide what your style is, and add size little by little as your account size grows.

WS

[rolange]

	Quote:	maildigger
	Has anyone ever thought about a Martingale (=if you lose you double your position the next trade) money management? In the long run it seems a bad idea due to the possibility of a losing streak and you can't keep adding contracts. What if you combined it with a strict daily money management? Let's assume the total maximum loss you will take is X and your daily goal is 2X or more.

I have considered it and the allure has attracted many others too. Interesting reading on another forum (Forex)and it seems to possibly work if extremely tight criteria are observed.
1. Trading micro lots on a basket of FX
2. Removing profits from accounts on a regular basis
3. Looking at historical volatility and acknowledging that days where there can be a move of 300+ pips without a retrace.

Far better to take small hits and ride the winners in my opinion.

[Dogpile]

check out the 'Kelly Criterion' -- a related topic.

Kelly criterion - Wikipedia, the free encyclopedia

Kelly Criterion % = W - [(1 - W) / R] = What % of capital to bet each time where;
W= Win % (Winning Trades / Total Trades)
R = Win/Loss Ratio (Expected Dollars Won When You Win vs Expected Dollars Lost When You Lose)

The optimum bet for the greatest growth of bankroll is making the full bet suggested by the Kelly criterion, but this produces a volatile result.

[maildigger]

Can give an practical example of that formula ?

[Dogpile]

So if Win 53% and win $ vs loss $ is 1.0 (equal):

Kelly Criterion suggests you bet 6% of your bankroll on each trade.

So if Expected Win % is 65% and win $ vs loss $ is 0.9 (equal):

Kelly Criterion suggests you bet 26.1% of your bankroll on each trade.

You can simulate this in excel by having it generate random numbers and excel can project the next 10,000 or 100,000 trades -- simply by taking your percentage win rate. You can then graph the results. The variance is absolutely sick. I suggest you do this long before you ever consider this as a money management technique because you wouldn't be able to stomach it.

The Kelly forumula is an interesting one to observe though. It is a nice mathematical way to show the interraction of % vs dollars won.

Personally, I think the key to trading is to get your % very high first with very reasonable 'stops'. This takes a long time. But once you do this, you can simply leverage your trades and grow capital without big variance.

Variance is a subject that is just hard for people to really comprehend. If your win rate is low and you seek big wins... you can just go on some awful streaks as the variance associated with low % plays out over time.

[maildigger]

How would this be used with trading futures ?

60% wins, 40% losses, R= 1.25 (incl commissions)

So:

0.60 - ( 1 - 0.60 ) / 1.25=
0.20 / 1.25 = 0.16

So risk 16% each time ... How many ES contracts should I trade if I use a 100K account?