Warning: I'm a newbie and haven't started live trading yet, so I might be talking complete ballcocks.
Background: Over the last few weeks/months I've been working full time on reading and learning (with the odd paper trading to get the feel of things). I've read tens of thousands of posts on FF alone, not to count articles, blog posts, books etc., elsewhere. I am aware of previous discussions here on martingale and some strong feelings on the subject. And I agree with them. I appreciate the nature of the finite funds available to us and that the market can stay irrational for longer than ... well, you know the drill.
So I've been thinking about how risk can be mitigated. In currency pairs there's no theoretical limit to which a currency can rise/fall. This obviously has downsides to using martingale as a currency pair can form a slow and steady move upwards/downwards with no reversals (unlikely, but not impossible).
However, some securities do have limits or virtual limits (and 0.00 is a limit for a currency pair on the short side). I've been looking at a few of these tradeable securities. But let's take indices as an example. The FTSE100 is trading at under 6000 after reaching a high (five years ago) of about 6700. Theoretically, it's unlikely to pass 7000 in the near future (though it's not impossible, but we'll come to that). Assuming you went short on the FTSE using martingale, you have an artificial barrier that the FTSE can't exceed if it goes against you. This known barrier also makes it easier to plan the position size given you know the available funds in your account.
To hedge against the worst case scenario of a 7000+ price one could take an option. A hedge against 7000 has got to be quite cheap in today's market.
The only risk that then remains is that the FTSE could go against us a long way (no pun intended) and stagnate. But such level of stagnation has never happened in the history of the index. To be on the safe side perhaps one could take a volatility hedge as well to protect against volatility dropping to near zero.
Where's the flaw in my logic? There's got to one there somewhere surely?
Background: Over the last few weeks/months I've been working full time on reading and learning (with the odd paper trading to get the feel of things). I've read tens of thousands of posts on FF alone, not to count articles, blog posts, books etc., elsewhere. I am aware of previous discussions here on martingale and some strong feelings on the subject. And I agree with them. I appreciate the nature of the finite funds available to us and that the market can stay irrational for longer than ... well, you know the drill.
So I've been thinking about how risk can be mitigated. In currency pairs there's no theoretical limit to which a currency can rise/fall. This obviously has downsides to using martingale as a currency pair can form a slow and steady move upwards/downwards with no reversals (unlikely, but not impossible).
However, some securities do have limits or virtual limits (and 0.00 is a limit for a currency pair on the short side). I've been looking at a few of these tradeable securities. But let's take indices as an example. The FTSE100 is trading at under 6000 after reaching a high (five years ago) of about 6700. Theoretically, it's unlikely to pass 7000 in the near future (though it's not impossible, but we'll come to that). Assuming you went short on the FTSE using martingale, you have an artificial barrier that the FTSE can't exceed if it goes against you. This known barrier also makes it easier to plan the position size given you know the available funds in your account.
To hedge against the worst case scenario of a 7000+ price one could take an option. A hedge against 7000 has got to be quite cheap in today's market.
The only risk that then remains is that the FTSE could go against us a long way (no pun intended) and stagnate. But such level of stagnation has never happened in the history of the index. To be on the safe side perhaps one could take a volatility hedge as well to protect against volatility dropping to near zero.
Where's the flaw in my logic? There's got to one there somewhere surely?