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Playing Russian Roulette with Martingales

  • #21
  • Sep 18, 2017 6:02am Sep 18, 2017 6:02am
It looks like the idea of this thread is that martingale MM is a smart move when you have an edge because it is supposed to boost the strategy. The problem is that the assumption is wrong. Martingale is only "useful" to invoke Lady Luck when you have no edgle. As soon as you have an advantage martingale becomes a limiting factor.

On the left, marty vs 1% with a flip a coin system. On the right, marty vs 1% with a very strong edge. XLS included so you can plug your own numbers.
Attached Image (click to enlarge)
Click to Enlarge Name: marty_sucks.png Size: 14 KB
Attached File(s)
File Type: xlsx marty_sucks.xlsx   211 KB | 345 downloads
No greed. No fear. Just maths.
  • #22
  • Sep 18, 2017 11:41am Sep 18, 2017 11:41am
son, i won't believe that you have a red flag after your ID to bring up this shit

but welcome to this trading world,

and here is your 1st obstacle,

and many will never go past it for their lifetime, lmao.......
  • #23
  • Edited 10:45pm Sep 19, 2017 9:22pm | Edited 10:45pm
Quoting PipMeUp
It looks like the idea of this thread is that martingale MM is a smart move when you have an edge because it is supposed to boost the strategy. The problem is that the assumption is wrong. Martingale is only "useful" to invoke Lady Luck when you have no edgle. As soon as you have an advantage martingale becomes a limiting factor. On the left, marty vs 1% with a flip a coin system. On the right, marty vs 1% with a very strong edge. XLS included so you can plug your own numbers. {image} {file}
Hi Pip. I think I have put enough disclaimers in my posts on this subject to make people aware that the martingale is a gambling strategy and not a trading strategy....so I don't dispute your great analysis......however....*and here is the but exclusion*

In certain instances where constraint boundaries exist to limit the downside risk of an aggressive progression, there are opportunities to exploit these forms of tactic.

For example.....a stock index, or spot commodity that is at its historical lows where your Maximum risk tolerance takes you to 0 provides a finite level of maximum risk exposure. Of course it may be possible that the market you are trading has a force majeure and ultimately is disbanded....however there are certainly instances today with Spot Gold, Silver and other commodities where an opportunity exists to apply a Martingale progression with a capped downside risk.

For example refer to the monthly chart of Brent below and this applies to quite a large number of instruments at historical lows. The areas highlighted in red would be where I could (within my risk appetite) apply a long-only Martingale progression to good effect provided that the maximum adverse excursion of the progression was at 0.

Attached Image (click to enlarge)
Click to Enlarge Name: Capture.JPG Size: 124 KB


Furthermore when these instances arise with instruments offering positive swap, the holding costs are progressively diluted through longer term holds while deep into your Martingale progression. Going long only with a Martingale progression in these instances is a bit of a no-brainer despite what the applied theory might tell you.
  • #24
  • Sep 20, 2017 2:07am Sep 20, 2017 2:07am
Quoting Copernicus
I thought I would open up a discussion regarding that dreaded word "The Martingale Progression". While many fear the concept given it's ultimate demise in account blowups, there are some things going for it when compared to more traditional trading methods. I am simply raising the topic as a discussion piece. It does not mean that I am an advocate of the Martingale approach so let's don't let this discussion get heated. It is for any that are simply interested in discussing these ideas. I actually am neutral in my opinion until it can be demonstrated...

I suppose my short response is if you have an edge why would you use Martingale?, if you don't have an edge, sit on your hands
I live entirely from the growth of my personal trading account
  • #25
  • Sep 20, 2017 2:57am Sep 20, 2017 2:57am
Quoting Copernicus
{quote} Hi Pip. I think I have put enough disclaimers in my posts on this subject to make people aware that the martingale is a gambling strategy and not a trading strategy....so I don't dispute your great analysis......however....*and here is the but exclusion* In certain instances where constraint boundaries exist to limit the downside risk of an aggressive progression, there are opportunities to exploit these forms of tactic. For example.....a stock index, or spot commodity that is at its historical lows where your Maximum risk tolerance takes...
I don't really see a martingale here. Isn't this just an aggressive averaging down?
No greed. No fear. Just maths.
  • #26
  • Sep 20, 2017 4:36am Sep 20, 2017 4:36am
Quoting GuyBaker
{quote} I suppose my short response is if you have an edge why would you use Martingale?, if you don't have an edge, sit on your hands
To get an extra boost in leverage under a portfolio with an edge when these conditions arise.......but it's just a little booster trick I picked up in rare conditions....simply disregard if you don't see any benefit.
  • #27
  • Sep 20, 2017 4:43am Sep 20, 2017 4:43am
Quoting PipMeUp
{quote} I don't really see a martingale here. Isn't this just an aggressive averaging down?
No probs Pip. Technically it probably isn't as there is a finite minimum and infinite maximum but the progression sequence can adopt a standard Martingale progression of doubling up when key thresholds are reached. The benefit of the cap however is that you can maximise position sizing in these rare instances and just let it run in perpetuity until your desired profit target is reached.
  • #28
  • Sep 20, 2017 6:24am Sep 20, 2017 6:24am
Quoting Copernicus
{quote} To get an extra boost in leverage under a portfolio with an edge when these conditions arise.......but it's just a little booster trick I picked up in rare conditions....simply disregard if you don't see any benefit.
Lost me, booster? surely the only time you would risk more is if you have a greater edge, what has the success or failure of the previous trade(s) got to do with anything?
I live entirely from the growth of my personal trading account
  • #29
  • Edited 9:56am Sep 20, 2017 6:35am | Edited 9:56am
Quoting GuyBaker
{quote} Lost me, booster? surely the only time you would risk more is if you have a greater edge, what has the success or failure of the previous trade(s) got to do with anything?
Forget it. You have lost me as well.

Actually I will ask you the following questions and then see if you get it.

What is the chance if Brent for example trades at $0?

You deploy a long strategy at level 1 at say $10 entry price with 1 position. Assume holding costs are zero. You have 4 equally spaced doubling down thresholds to $0. If price is against you and reaches level 4:

 

  1. What is your average price on your cumulative position.?
  2. What is your maximum risk exposure?
  3. Now what is your maximum profit potential?


What is the difference between applying this to an index or commodity versus say a forex pair?

  • #30
  • Sep 20, 2017 6:53am Sep 20, 2017 6:53am
Quoting Copernicus
{quote} Forget it. You have lost me as well. Actually I will ask you the following questions and then see if you get it. What is the chance if Brent for example trades at $0? You deploy a long strategy with a trade risk of 0.5% at kevel 1 at say $10 entry price. Assume holding costs are zero. You have 4 doubling down thresholds to $0. If price is against you and reaches level 4 what is your cumulative risk exposure? What is your average price on your cumulative position.? What is your maximum risk exposure? Now what is your maximum profit potential?...
That is not Martingale. Martingale is a progression strategy based on the success or failure of previous events (trades in this case). What you are describing is a change in conditions in your favour that suggests a bigger stake may be beneficial. See my post 28
I live entirely from the growth of my personal trading account
  • #31
  • Sep 20, 2017 7:09am Sep 20, 2017 7:09am
Quoting GuyBaker
{quote} That is not Martingale. Martingale is a progression strategy based on the success or failure of previous events (trades in this case). What you are describing is a change in conditions in your favour that suggests a bigger stake may be beneficial. See my post 28
I think we may be quibbling about technicalities because if you took a short strategy using this same principle, you most definitely would be applying a simple Martingale strategy as your risk exposure is unlimited. The difference here is that you are trading a real market with asymmetrical constraints and not applying the same progression principle on a roulette table with no such constraints.
  • #32
  • Sep 20, 2017 7:13am Sep 20, 2017 7:13am
Quoting Copernicus
{quote} I think we may be quibbling about technicalities because if you took a short strategy using this same principle, you most definitely would be applying a simple Martingale strategy as your risk exposure is unlimited.
OK we leave it, there must be some misunderstanding on my part.
I live entirely from the growth of my personal trading account
  • #33
  • Edited 9:02am Sep 20, 2017 7:23am | Edited 9:02am
Quoting GuyBaker
{quote} OK we leave it, there must be some misunderstanding on my part.
Fair enough. I concede to. I am a self confessed Martingaler in rare instances...well that's what I say at the help group meetings I go to:-)
  • #34
  • Sep 20, 2017 9:08am Sep 20, 2017 9:08am
mg + luck allow you to start small.
nobody gets it .
the higher the risk, the higher the return. there are better options out there but the concept remains the same.

split your investment, take the money and run.

p.s.averaging down is 100% martingale... but he knows.
  • #35
  • Sep 20, 2017 9:42am Sep 20, 2017 9:42am
For those addicts like me and Hey You who might be wanting some answers to the questions posed above in Post 29. :-)

Attached Image


There is nothing like the topic of Martingale to bring split debate.
  • #36
  • Sep 20, 2017 1:21pm Sep 20, 2017 1:21pm
Quoting Copernicus
For those addicts like me and Hey You who might be wanting some answers to the questions posed above in Post 29. :-) {image} There is nothing like the topic of Martingale to bring split debate.
lol I understand your point of view, very different from mine.

just wanted to say what I think about mg and high risk in general.. many ppl say mg is useless, it's not useless.

here on planet earth we don't have such strong risk-free edge.
  • #37
  • Sep 20, 2017 2:33pm Sep 20, 2017 2:33pm
Quoting Copernicus
For those addicts like me and Hey You who might be wanting some answers to the questions posed above in Post 29. :-) {image} There is nothing like the topic of Martingale to bring split debate.
btw I understand that you simply add a position when price is near sl, without risking 100% of your kapital.

That is a good move IMO c.
  • #38
  • Sep 20, 2017 2:58pm Sep 20, 2017 2:58pm
Quoting Copernicus
{quote} Forget it. You have lost me as well. Actually I will ask you the following questions and then see if you get it. What is the chance if Brent for example trades at $0? You deploy a long strategy at level 1 at say $10 entry price with 1 position. Assume holding costs are zero. You have 4 equally spaced doubling down thresholds to $0. If price is against you and reaches level 4: What is your average price on your cumulative position.? What is your maximum risk exposure? Now what is your maximum profit potential? What is the difference between...
I did scale trading (similar idea to Martingale, but same position size) on crude oil back when it was in the $20's. You can scale trade or martingale on a commodity, because it will NEVER go to $0. You won't have oil, corn, wheat, gold, copper, etc. be free. Producers will stop producing which will make the price go up eventually.

Can't say that for stocks or currencies though.

EZ
  • #39
  • Edited 10:49pm Sep 20, 2017 4:07pm | Edited 10:49pm
Quoting ezcurrency
{quote} I did scale trading (similar idea to Martingale, but same position size) on crude oil back when it was in the $20's. You can scale trade or martingale on a commodity, because it will NEVER go to $0. You won't have oil, corn, wheat, gold, copper, etc. be free. Producers will stop producing which will make the price go up eventually. Can't say that for stocks or currencies though. EZ
Agreed. The softs, metals and energies are ideal and can provide super compression at historical lows to amplify your leverage potential. Indices particularly top 50, top 100 etc are an opportunity but individual stocks can and do go to zero. Forex pairs with positive swap in the long direction are ideal as there is a holding cost net benefit..but we need to ensure they are liquid currency pairs such as the majors as some emerging currencies can be put on hold...eg. Rouble

Here is a handy website where you can monitor commodities. When current price starts to exceed -100% of the last 10 years highest high, set your alerts and then check them out on your monthly charts. There may be opportunities to get creative with derivatives if the distance to your maximum risk tolerance is a minimum and history demonstrates future profit potential. These are possibly the small trades (nest eggs) you make on the side with 'rainy day' long term potential......but ensure you also check out holding costs and form an opinion on whether that instrument is headed towards zero and anticipated to be de-listed from the exchange.

PS Also ensure you maintain sufficient funds in your account to handle the worst case maximum risk scenario to ensure a Margin call is avoided. You may find that an unusual spike lower can catch you unawares and your broker will close all your positions in this instance (eg. recent Silver spike) if you do not have sufficient funds in your account.
  • #40
  • Edited 8:04pm Sep 20, 2017 6:53pm | Edited 8:04pm
As traders our efforts need to be placed on exploiting opportunities when they present themselves. An edge in reality is borne from a very slight bias in an otherwise random return series. The reality is that this edge is elusive and actually is very hard to pin down as what appears to be an edge on a 5 year timeframe may not be an edge over a 20 year timeframe and so on and so forth. A statistical edge can never be quantified with certainty and always needs a time horizon defined with a confidence interval attached to it.

To end this thread....as it is pointless trying to debate the validity or not of the Martingale given the stigma attached to it (which is fair enough under it's normal use)....I would like to just add the following comment.

When opportunities present themselves under a greater degree of certainty than is otherwise available...such as an informational advantage (eg. insider trading), a statistical advantage (such as the particular form of progression under defined constraints as described above)...or an advantage provided by positive swap or other forms of genuine arbitrage....then these are the opportunities (provided they are legal) that we should pounce on as on this very uneven playing field you will quickly find that your back is up against the wall and your chances of long term survival are questionable at best irrespective of whether you think you have an edge or not.

This game is all about exploiting opportunities. It is not a fair game and provided we can play the game with a degree of ethics....then that's about the best that we can hope to achieve (in general). There will always be exceptions to this, so please understand that this is a generalisation.

Cheers

C
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