Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
Consider this....when speaking in binomial 50/50 equivalents.....
a strategy that's 50% win rate, needs a 1:1 Risk Ratio (techinically better with slippage and fees) or better
a strategy that's 33% win rate, needs a 2:1 Risk Ratio or better
a strategy that's 66% win rate, needs a 1:2 Risk Ratio or better
Given that a system with a 50% win rate can expect a 1.5% chance of six losers in a row, so a sample size of 100 trades....
the bottom line is that the larget your sample size, the more chance you have of longer strings of winners and losers.
In order to reduce the consecutive losers, you could try to increase the R/R ratio....but usually that comes at a cost of win rate (it's very difficult to increase your profit targets and decrease your stops and still maintain the same edge)
What you'll find is that reducing the win rate, increases the odds of strings in kind....
In the end....you'd need like a factor of 100 times your standard risk unit to get the odds of getting felted down to even something someone would consider trading.
From my own experience, I've reduced the market down to a 50/50 flip (with a 1:1 RR) fairly accurately and the strings over a 10,000 trade set can be as high as in the 20's.
Bottom line, unless you're attempting this on an equity, where you can double your bet without incurring the additional margin requirements of a futures contract.....
in short, no, it doesn't work for very long...otherwise everyone would do it.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
A martingale approach is usually triggered by loss aversion. If you average down, it becomes easier to make it back to breakeven. Most of the time it will actually work, and you will exit at breakeven or with a small profit. Then on a few occasions, you will lose your pants. You will see your equity curve gradually rise, interrupted by a few catastrophic losses, which will erase your wins and further eat into your equity.
Better than following a martingale approach would be to simply take your loss. Then reevaluate the market without the bias that you have when a position is on. You can always reenter, if a new signal is produced.
To summarize, a martingale approach is usually one the fastest ways to deplete your accounts.
There might be some exceptions though. If you are a countertrend trader (or market maker), and if your pre-established and backtested rules allow to add to your position, when a second signal occurs, then you may well add to the position at the "better" price. However, this is a dangerous game, if you do not honour your precalculated stop loss. I am not doing this, as it has a negative impact on my drawdowns.
That's what some investment banks/firms like MFGlobal did by "rehypothecating" their bets against European debt. Their use of London's severe lack of re-leveraging rules enabled them to increase their bets as Corzine thought the regular margin call rules didn't apply to them until it couldn't be hidden anymore.
I like that summary, cory. Here is an example of a "disaster" and a "disaster in the making" from the Collective2 site. Both systems have very high % wins (98-99%). Personally, I like to follow this site to better understand different trading systems and "what not to do".
.
The guy from M3 Financial seems to make it work quite well for him, from what I remember from his webinars here on futures.io (formerly BMT). It seemed like if you are trading long term, have deep enough pockets, and build up to your full positions incrementally in a pre-defined fashion as the market moves against you, it can potentially be quite profitable.
I use it it my Automated Strategies and I think its an valuable addition to my approach. I doubt if it would work with discretionary trading
I totally agree with this statment ...... But I do the following
For me to trade any strategy I must have a minumum value of 100 to my custom metric which is ........................avg win:avg loss*%profitable trades.
example avgwin $100 /avg loss $50=2*55%profitable trade=110
My negative progression (martingale component) is customized (it doesn't double every loss)
I have a limit on my backtest results for losses in a row.
I'm trading fx on MT4 so can have small postition sizes=deep pockets
