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Normally, I do not lose time on this kind of things, but I will make an exception here, because what is proposed is not entry/exit rules, but a position sizing system (martingale). I wanted to drop some notes here in case some one would be looking for information. The proposed system is dangerous for your capital.
Let’s suppose that we have a (profitable) trading system with the following parameters :
- %win: percentage of winning trades
- Win/Loss: ratio between the gain in case of winning trade and the loss case of losing trade
Let’s consider a sequence of 12 trades. The question is: which position size to choose for each trade?
We can choose to risk the usual 1% of the capital per trade.
We can choose to double the position at each losing trade. A sure way to ruin.
Mostafa Belkhayate proposes a position sizing rule and pretends that this rule will lead to marvellous gains.
This system works a follows:
- if last trade was a loser, position size for this trade is the same as for the previous trade (no doubling)
- if last trade was a winner (and the one before was a loser), position size for this trade is the same as the cumulated loss until now, plus one unit
- if two last trades were both winners, we have obtained a cumulated gain of +1, and we stop.
Mostafa Belkhayate takes the exemple of a coin toss (%win = 50% ; Win/Loss = 1). The expectancy of this system is 0. But Mostafa Belkhayate pretends that his position sizing system will turn it into a (very) profitable system.
He asserts that the probability of not having 2 consecutive winners in a sequence of 12 trades is negligible, so the trader is “guaranteed” to finish the sequence with a gain of +1.
This is false.
First, the probability of not having 2 consecutive winners in a sequence of 12 trades is far from negligible. The probabilities shown in the videos are simply wrong (by the way, some are > 100%!). Actually, according to my calculation, the probability of having 2 consecutive winners in a sequence of 12 trades is 94% (in coin toss situation).
So, there are 94% of chances to gain +1. And 6% of chances to lose… much more!
The following graph (produced with R) shows the 4096 possible equity curves (on 12 trades).
3863 sequences (94%) lead to a gain of +1.
But 233 sequences (6%) lead to a loss which could be as bad as -47.
It means that, if you have chosen to trade 1% of your capital for the first trade, you capital could be divided by 2 after 12 trades!
Of course, the expectancy remains 0.
In other words, in this coin toss hypothesis, the expectancy is not improved compared to a fixed risk of 1% of the capital for each trade, but the risk has increased a lot. A way to ruin.
From your description of his position sizing rules, I am pretty sure that it is a well-known gambling strategy known as "Oscar's Grind". Oscar was apparently a gambler who was happy to just make small profits on a consistent basis.
No way.Mathematically,Martingale is the worst system imaginable,it leaves massive dangling positions until they blow up, it will look good till that one massive losing trade.But then again,Mostafa is an ex-world champ,and they have limit for bets on chances in casinos,as well.
BTW, I was confused not by the figures,but by what you`ve written.
