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Hi Russ
I trade margined FX so my comments my
not apply to stocks.
The greatest problem with the Martingale
method is that it increases the amount risked
exponentially and no fancy footwork that I know
of can overcome the problem.
e.g.
Let's assume I trade 5 contracts with the potential
loss on any given trade being $1000.00 per contract.
I take a loss and to make up that loss I now trade
7 contracts. If this trade losses, I lose another
$7000.00. So now I have lost a total of $12000.00
To make up the loss on the two trades, I trade 10 contracts
which again produces a loss. I have now lost
$10,000+$7000+$5000 =$22,000.00. If I had kept to a level
stake, my loss would have been $15,000.00.
In other words I have increased my losses by a massive
47% ($7000/$15000).
I know, I have only looked at the losses and I have increased
my contracts after each loss. You can impose filters - nevertheless
the basic problem remains - no matter what the filter, a string of losses
will dramatically raise the risk of ruin.
We are playing a probability game with profits and losses
randomly dispersed. If we are in the game long enough we will
inevitably get the dreaded prolonged drawdown and our
money management must be such as to enable us to survive
that event.
The problem with the Martingale approach is that it inherently
focuses on the reward side of the equation.
I don' want to be seen to be advocating a fixed set of
contracts for every trade. The problem with this approach
is that it focuses on the risk side of the equation. It is all very
well for money managers to advocate limiting risk on trades
to 1% - 2% of capital. But if you have a $20,000.00 base, you
need a money management approach that addresses
both sides of the equation. Doing this your capital will be
able to grow without increasing risk inordinately.
The best book on money management I have seen
is Ryan Jones "The Trading Game" US$49.95 but you can get
it for less from Barnes and Noble. It addresses the issues
raised here.
No you won't need to buy the software (poor value
for money) and you won't need to attend his seminar.
The book gives enough info so that you can use Excel etc
to implement your money management approach.
regards
ray
R Barros
101/25 Market Street
Sydney NSW 2000
Australia
Voice: 61 2 92673470
Fax: 61 2 92673478
E-Mail: rbarros@xxxxxxxxxxxxxxxxxx
---------
> From: TWA7663@xxxxxxx
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Subject: Money Management
> Date: Tuesday, May 25, 1999 9:11 AM
>
> I have heard from several traders on this list or other trader lists that
bet
> size based upon a martingale method was stupid unless it was a reverse
> martingale (bet more on wins, less on losses). BTW, my use of the word
> "martingale" merely means that bets are varied by an amount that is
> determined from the previous wins and losses. It can be any algorithm,
not
> just the stupid "doubling down" after a loss. I also define a regular
> martingale as a method that requires buying more after "some, not
necessarily
> all" losses; whereas, a reverse martingale often requires buying less
after
> "some, not necessarily all" losses.
>
> About four years ago, I spent a couple of hours on the phone with a
retired
> statistics professor that had also spent a lot of time working with some
> missile company. Please excuse that I can't remember his name or all the
> facts about the professor; however, I "do" remember he .....
>
> 1. Traded a significant stock portfolio.
> 2. Traded only long positions
> 3. Used a sophisticated modified martingale. It was a unique algorithm
that
> often purchased more shares when the price went against him. It was
always
> in the market unless certain predetermined circumstances occurred (rarely
out
> of the market because of the stocks chosen to trade). I could explain it
in
> detail but it would take a very lengthy discussion. We had fun talking
> because I had been kicked out of the Tahoe casinos when I was using my
own
> modified martingale. They thought I was counting cards.
> 4. Claimed to have had huge annual returns for several years. If I
remember
> correctly, over 50% annual on some stocks that had gone sideways or even
> lower for a year.
> 5. Chose stocks that had high short term volatility relative to their
very
> low longer-term volatility.
> 6. Said the concept would work with any market and that he had a friend
that
> was making multiples of his returns with OEX options. He chose low
> volatility stocks because his risk was extremely low.
>
> I told him about the negative remarks about martingale systems that I had
> heard from other system gurus. He said that most just did not know how
to
> minimize the risk incurred from martingale systems and did not know how
to
> enhance the positive features. His algorithm went to great lengths to do
> this.
>
> I became quite excited with our discussions and spent a lot of time with
> Excel to test his concepts as well as other martingales. I even hired a
VB
> programmer to help. I abandoned the project because others on this type
of
> list and friends discouraged me. In addition, it was going to cost
thousands
> more to develop code for what I considered an adequate method to test the
> concept. I feel most comfortable trading systems that I have tested that
> generate 100000+ trades. I realize that may be overkill, but that gives
me a
> psychological edge. Since I was still very "green" at trading and easily
> impressed by negative comments, I abandoned the idea. However, my very
> preliminary testing seemed to show that the professor's method and some
of my
> own variations worked great. Many times I wish that I had continued.
>
> Has anyone tried to develop martingale ( that may buy more after a loss)
code
> that will simulate thousands of trades across multiple markets?
>
> Has anyone actually traded this way?
>
> If someone can answer yes, I think their experience would be of great
> interest to many of us. In addition, if there is a proficient VB
programmer
> out there that wants to help develop a system, I can share what I
learned.
> I thought about developing EL code with a "C" program linked to it, as I
have
> done many times. I have spent thousands on a "C" programmer that is also
an
> EL expert. However, I think it is just easier to use Excel because of
some
> of the crazy problems encountered with Easy Language. I have a problem
> trusting EL results.
>
> Like most on this list, I have heard many negative reasons why NOT to use
a
> system that may buy more after a loss. I hope we could benefit by
limiting
> the discussion to those that have tested or traded with success by buying
> more after losses. If we get no further discussion, we can assume that
none
> has or none knows of anyone that has had success with this method.
>
> Russ
>
>
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