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In a message dated 5/24/99 5:21:25 PM US Mountain Standard Time,
felixty@xxxxxxxxxxx writes:
<< Maybe your prof is doing scale trading,and also with stocks only,not really
practical for futures,as in stocks we can afford to be stuck even for years
and
with the historic bias of the equities market,you can say the professor has
the
odds stack in his favor*,the right instrument ,the right time and the right
market,how about if we have a prolonged bear equity market as the other side
of
the coin? Can his system's results be as good? So far he may just have been
rewarded by a good market and not by his "system",with the US equities
market as
a "well chosen sample" >>
No, it wasn't scale trading.
Being on the right side of the trend for trading is very helpful and using
the martingale is no different in that way. However, a martingale will work
on the short side as well as the long if the bear market is as great as the
bull with longs. In fact, an excellent way to trade the martingale is to
find a market that is moving sideways (low volatility) based upon weekly bars
but has high interday volatility relative to the longer sideways/low
volatility. Then one can run a martingale on the short side simultaneous to
a martingale on the long side. The net profit is made when each sequence has
completed. Prior to completion one sequence may be losing more than the
algorithm allows while the other is winning. One merely temporarily stops
that sequence while continuing the winning sequence. When the short trend
changes in favor of the losing sequence then trading resumes on that side.
You are never 100% hedged but it significantly minimizes losses.
It is important to remember.......
1. Do not get locked into thinking that you MUST trade the same security
until a martingale sequence is completed. One can use only high probability
trades in a basket of 10,000 stocks or a basket of commodities if desired.
You may have traded 10 different securities prior to the completion of one
sequence.
2. Do not get locked into thinking that you have to take "every" trade that
gets a signal based upon your trading system. You only take a trade if the
martingale algorithm gives you permission to take the trade.
3. Do not get locked into thinking that you have to complete every martingale
sequence to be successful. Some traders terminate the sequence whenever it
shows a profit. That may be after the first trade or 10 trades. If this
method is used then a new sequence is started immediately after the previous
profitable one was abandoned prior to completion.
4. Do not get locked into the martingale concepts seen in gambling books.
The martingale sequence is NOT the complete trading system. In my
discussion, it is nothing more than a method of varying bet size. "Its ONLY
limit is that it adjusts bet size by fixed rules following a win or loss."
Those "fixed rules" can be anything that the mind can create. The trick is
to find the algorithm that has a greater reward/risk than our current method.
If you limit your thinking to the "conventional" descriptions in gambling
books, then you will never see the potential of the martingale. Let's say
that your current system allows for a maximum of $10,000 loss on one trade.
If so, then substitute your thinking to a martingale sequence that is aborted
when the "net loss" of the sequence is $10,000. It is still $10,000. In the
case of the martingale, you need to have individual losses within each
sequence that is significantly smaller than $10,000. If the net loss within
a sequence becomes $10,000 then you treat this as you did the stop loss in
your current trading. This is just one example on how to control risk. The
types of martingales are limitless. It is my desire to unleash the fertile
minds on this list for money management systems.
I hope this will this will stimulate all those mathematical minds.
Again, I hope this brings forth some positive "bet size" thinking instead of
the usual reasons why it won't work. Maybe I should have called "bet size"
methods something other than martingale.
Russ
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