Magix, Martingales, and Market Myths

Throughout my years at ForexFactory, I have been a member of many threads, opened a few of my own and been a part of conversations on several different subjects, from the interactive trading, through the trade systems and a lot of stops in between.

There is always a seemingly commonality to all of these and that is the misunderstanding of the most basic market concepts that reaches past semantics and a difference of mother tongue.

These can break out into heated debates and end run, there is still a gaping hole where information could be, but emptiness and ignorance always seem to prevail.

Even with the most enlightened passes and excerpts taken from other trading sources, statistical data that is brought in from all over…there is still a lot of confusion. I get it…there is a lot of information available and for the Average FF member, relatively new to market and trading, new to certain ideas and ideals, following blindly in the hopes of grabbing a small share of their own.

Context!

Just because a phrase or statement relates to market, does not make it relevant in all conversations and even worse yet, the information posted may not only be inaccurate, but completely worthless rhetoric that has been grapevined throughout the pages here and at other forums.

All of the world’s problems as is trade related will not end here…but I do hope to clear up some of the confusion and ignorance that runs rampant.

Let’s start off with the base idea of Martingales.

Martingale is definitely a taboo around here and at a lot of other trade forums, but why?

What makes these such a terrible thing?

Why do so many people weigh in so heavily on this one seemingly simple concept?

I’ll be the first to tell ya, that most people don’t know JACK. Sure, they’ve read something someplace, or have done the math, their math, or ran one once, or knew a guy or are just chiming in to agree with a friend…but this really is the extent of the information that you will find readily available.

The assumptions made are pure speculation brought about by this same spread of grapevine ignorance. One guy says something, somebody else adds a piece to it, by the time it hits your eyes and ears, and is of no more value by application to trading than my grandmother’s banana bread recipe.

What is most amusing is those who show up and spout that they would never use a martingale system…and yet if you look at their trade explorer you’d see how many positions they have in a single instrument…the historical trades taken and how they actually stack up…but Nooooooooooooooo, they’d never be so stupid as to use a MARTINGALE!!

It’s actually laughable.

Other perspectives range from a single trade taken, held for ever, and cashed in just above square with swaps to consistent stop loss losers with an equity curve that is a 45 degree angle from top left to bottom right of their trade explorer, (these are the people who mandate stop loss and take profits but cannot seem to grasp the overall concept of when).

No, not all traders that have an opinion of Martingale Systems are Market Losers…but because somebody is profitable in a single methodology, doesn’t necessarily make them an authority on all other related subjects...even if they can back up their statements with statistics and quotes and big words that sound and look really important…

Ya wanna know why?

Because there are an infinite amount of ways to apply a Martingale concept to your specific trading and the information being passed may not be relevant.

Is the fuel economy of a 1998 Plymouth Voyager the same as a 2004 GM Safari?

Yeah…I don’t know either.

It takes a grand amount of willing ignorance to equate all things to being exactly the same…especially if you’ve shown up in a quest for information…and the only information you can find, is based on a single idea.

THE MARTINGALE

The idea behind Adding a position or doubling down on a bet comes from casino gambling. Betting on a 50/50 shot and consistently adding to your position keeping the same side, until you are either profitable or broke.

I’m sure there are a lot of great stories about this, not a single one of them am I interested in hearing or reading about, so if you have one…keep it in that special place for yourself…it’ll only stand to add clutter and confusion.

WHAT IF, you’re at the casino and you had 3 bucks left in your pocket…you bet on black with your first dollar…and red came up. You’ve got 2 left, this cash is earmarked for this very purpose, are you going to double down on your first bet and carry on with black, or would you take chance on it coming up red again and placing a single dollar bet again?

The answer to this and please try to follow my math and statistics on this…

WHO CARES!!

The market, although quite often treated like the casinos, isn’t necessarily just a game of chance. With a strong idea of movement, sessions, ranges, base technicals or fundamentals, you can actually improve your odds to be greater than a 50/50 shot. I know for some, this may seem like the myth, but in actuality, it is true…

Let’s say you are a hobbyist trader, or even a wannabe pro…you limit your time in the game and don’t want to leave trades open. You’ve committed to what you are willing to risk as well as what you consider a reasonable reward.

If you’d take a single position for 3 lots (of whatever size you trade), does it make you any less smart if you have broken these 3 lots into more than a single trade? What if these lots were allocated to more than a single instrument…does this mean that you shouldn’t be doing it, because in effect it may be deemed as a Martingale?

How??

Like this…

You are watching EURUSD, AUDUSD and GBPUSD…no news is on the calendar for the day, but you believe your charts are showing an overall USD weakness. It is the beginning of TK but AUD has been playing strong…you are going to risk a single on EURUSD because you’ve got a better spread on that one…it’s playing a little laggy, you’re in the stink a few pips but now…AUDUSD has pulled back a touch and you ain’t sitting up all night with this…you drop a deuce on AUDUSD and let’s get this party started!!

But Wait!

OH SHIT!

Do you see what you’ve gone and done now?

You’ve added a double position against USD to a current losing trade!!!

If you have made a decision based on the information you have readily available and played in this manner, you have Martingaled…

Yup…that’s it in a nutshell…

The idea that Martingales are either Do or Die situations from here is too, another myth about them. There are definitely still some of these floating around, but we have come a long way in the world of automation and even on manual strategies with these same simple concepts.

Now…if you money management tells you that you need to stop at this point…if your time allowance is only going to expire in a relatively short amount of time…if you typically close trades before closing session…guess what? DO exactly that! Take your profits, or cut your losses and come back another day, the market is sure to be waiting for you.

The limitations you put on any single system should be dependent on what you consider reasonable money management. This is up to the size of the lot you play for the account that you have as well as the number of positions you will take in any directions in accordance to your personal strategy. Anybody that tells you different, should be minding their own business. Really, your money is yours and yours alone to trade as you see fit.

Martingale Strategies…

How many are there?
How many types are there?
How many strategies are available?

I couldn’t even come up with a reasonable number for any of the above questions…and the real reason is, because it really doesn’t matter.

You aren’t siding with the winning team…
You aren’t going to look more handsome or witty because of your methodology…

If you find success in a strategy that runs under a basic Martingale, or Cost average system, and you feel that you want to share the ideas…why not??

Typically…ridicule.

Check out any thread that has the word martingale in it and see what you find, and for what?

What we have already seen as simple misunderstandings under the terminology and applicable concept??

Oh I know…some of the things that are going to be said here;

That’s not a martingale
That’s not what it means
That’s not how it is played
That’s not a true system…

The thing is…about everything I am going to cover in this thread, is going to be on the BASIC martingale concept, it’s evolution and application…

If you don’t like it, there are like a zillion other threads to visit…go be a part of somebody else’s party.

Reducing Market Exposure and Limiting Losses.

The idea of cost averaging or as it can be applied to in Martingale strategies is unique to almost all. The idea that 2 traders will have exactly the same positions, all of the time is inconceivable. Given the 24 hour trade clock, the entire globe showing up for relevant and active sessions, the amount of brokers, terminals and strategies...

Try get them to all line up...

Ain't never going to happen.

So, you are unique, just like everybody else.

At some point, during your active trade session or in the time you commit to market, you will assess the charts and deem a reasonable position and then...push a button!

Bam, you've bet on red...or black or well, shit, you really only had the 2 choices in an actual trade...but you are in it!

If you have a reasonable understanding of trades and market movements through your current trade methodology, you will appreciate that every position you take is an exposure to market and the likelihood of you nutting every top and bottom of market is simply impossible. Ya might get it right once or twice...might even be able to do a little better, but overall, statistically speaking, without the use of statistics is that you are not going to be the perfect nutter.

So...your options are to hold and wait for a little bit of a draw...or fold and wait for another opportunity. Or lastly...and the reason we are all here...you decide to cost average!

Which ever decision you make, make it your decision and do this by the most reasonable information that is available.

If you've taken a long and the market moves immediately against you 25 pips, there is a good chance that you've picked the wrong time to trade and the wrong position to take...stealth movements like this happen to the best systems, to the best traders...but, you are still left with options. In something as drastic, perhaps adding to the misery isn't exactly what you want to do...adding a position may not be in your best interest...but before you push the button to exit or add...reassess the reasons that you took your position in the first place. A whipsaw in market can headfake you into a loss can even trigger you into chasing momentum only to have it turn again making you a 2 time loser!

I've been there.

Anger trades...frustrated...needing revenge!!!

Let cooler heads prevail!

Here's a little secret for ya....shhhhhhhhhhhhhhhhhhhhhhhhhhhhh....

If you are playing a direction and the market suddenly changes, the top of the hour will typically produce a spike high or low. What can you do?

If you are watching the clock and there isn't any news in play, you can find a cost average position, to help minimize your losses. You are actually going to increase your exposure to market, you can use a simple martingale approach and you can actually reduce your losses if not gain on prosperity, by finding these pivotal market tricks or movements.

Market Martingale Myth!

Adding to a losing position is only hoping to gain profit!

This my friends, pure bullshit!

Adding to a position to reduce your loss is an acceptable concept and if you are sure in your trading, an acceptable practice to help increase your profits and decrease the time you are exposed to market.

Having some clear goals and personal guidelines is definitely going to be to your advantage here, but because you have picked a taboo methodology, doesn't mean anything more than the fact that you have made a decision that you feel comfortable with in your trading.

was flipping between this thread and a eu/au/gu basket currently short and then read this sentence. woah....

Have you ever taken a position and after all of your readings and market research here and at other forums, exited, hard stop...

Only to watch market go right back to where your trade was and continue moving into what would be your prosperity, but is now a hard core loss?

After tipping stuff over and creating new profanity...you are now leery about taking a position at a higher level...so you sit out and just watch.

You're not alone.

Read through any active trade thread and you will see this very thing on a daily basis.

Read through the bullshit statistics and you will always find some clown talking about how much time market is in range and how much time it is trend...

This moves into the absolute basics of both the successes and failures of full on, balls to the wall, big nuts out Martingale Strategies. Where they all work, until they don't work and then you are left with a big stinking hole where you once had equity.

This, is the risks you take with a blind strategy without the benefit of information.

Continuous cost averaging adds against the trend with an increasing lot size. When the shit hits the fan, you are left sobbing in the fetal position in your bathroom...feeling dirty. These systems, I am not a huge advocate of. If there is no reasonable logic, or nothing that I can understand...I am simply not interested in taking part.

I've done that...lost big...don't think anybody should do the same.

If you cannot understand and lend a little of your personality to either an automated or manual strategy, it is probably not going to be of any benefit. As applied to Martingales...well, shit...the market runs 24/5, the idea of automation is to have market representation when you cannot be there...in the event of a misstep of logic, your account can be handed over to your broker in a single session.

But let's be real here...

Step back for a moment and start to understand the very real thing that is RISK.

FF has the tools and the technology...you can actually take a glimpse into the life of other traders through the use of their trade explorers.

One thing you will find, is that people lose money daily...weekly and monthly and this isn't by use of a Martingale Strategy, nor cost averaging...this is by 100% pure bad logic.

How many days/weeks/months have some of these people been in market...how many trade explorers have they blown through and how the only consistency that is apparent is that whatever position is taken, has generated a loss.

The very real part of market, is that you are exposing yourself to an uncontrolled situation, in mere hopes of prosperity...a lot of those who stop by, won't be here next week and definitely not next year.

Market consumption is a very real thing!

Martingales, like any other strategy, offer this same risk. The part that makes them more dangerous, is by way of misunderstanding the system, it's application and the funds required...not unlike any other idea in trading, with exception of adding positions to loss speeds up this process. If a single position can wipe out 5% of your account, what happens if you double in after? You lose proportionally to the trades that are averaged in...

Is there risks?

Yeah...there is.

But the risks start as soon as you have a live account with any broker that is funded with your hard earned money...not by any single strategy or methodology.

This is a very good post Magix...you hit the nail square on....using a Martingale Strategy is just that....a Strategy...same as any other. The person who is applying that strategy is the one who is in control...or not!

Whether the trader uses Martingale, Idiot Elliot Waves, Fibs, Candlestick Formations, Harmonic Patterns or any other strategy, he/she is the one who pulls the trigger and therefore must accept responsibility for any losses or wins. One could blame the strategy for losses, or blame the market, or the broker, or slow Internet or spilled coffee or whatever, but the bottom line is the person who pulled the trigger is responsible.

Now.....99% of what I read at FF is complete bullshit. Most of the traders haven't done their homework at all.....not really even tried to do any. People come here and expect to download a system and be rolling in dosh by the end of the year.....muppets!

Before one can apply a Martingale Strategy successfully, one must be actually able to trade profitably, consistently!! Depending one's system, and assuming that one can trade his/her system consistently profitably, then a Martingale Strategy might be employed instead of the more usual SL way. But too many people come here and read all the bullshit from other muppets and enter the market in a gung ho fashion and start losing. Soon, they will see Martingale as a way to stop losing and so begin using it. In the not-too-distant future they will lose everything, and they will not accept responsibility for the burnt account, nor will they blame their system. They will almost certainly jump on the band wagon and blame Martingale.

Martingale in the wrong (read 'inexperienced') hands will be devastating. So will a top fuel dragster or an F1 race car. When the spectacular crash comes, it isn't the fault of the machine, it is the fault of the driver!!

The best of strategies can produce losers...it's not always the wins that keep you in market, it is how you can deal with the losses...


As posted...

Grids and Gales!

If you wanted to take the literal martingale, by standard methodology, it would be a single position taken with a hard stop on profit and loss.

The supplemental position would effectively be a double of the primary position, in the same direction, with the same hard stop on profit and loss...each subsequent position would continue to double the last until the eventual profit or explosion of the account.

Ya don't find a lot of these.

There is a certain essence as is applied. The theory goes, that even a broken clock can be correct 2x per day...so if you buy every hour, and look for a reasonable target with a reasonable stop loss, and double every time it loses, you can in effect make money.

The chances of being 100% wrong on this...well...they are there to the point that I'd personally never want to apply this base methodology...but not to say that if the situation cannot be tested and applied and especially if this was done by way of trend or immediate trend direction...

What is more common is the hold and add.

These are where shit can get real, fast!

This was the introduction of a standard static grid as applied to a martingale methodology, and quite honestly, my first exposure to the idea.

You take a base system...or indicator, and you find your primary trigger. From there, you guess a static based range that the chart will move and add based on this, as well as finding a hard target for profit.

What can be said...they can and do work...but, definitely not the safest methodology one can apply.

By adding in single positions and never taking a profit, a single pair consistently added with larger lot sizes per trade requires some pretty deep pockets to play.

In a single week, I watched a trader lose over $60k with this methodology, the bulk of it during FOMC on Cable. One of the single largest cable spikes I've seen in a single session, certainly not the way that I would choose to go down.

You can find this EA and others with different triggering logic and even adaptive ranges here at FF.

LINK

The allure of this system is that it looks for a small profit range, adds at static intervals, but because of the skinny profit range, in a lot of cases and especially in a choppy market, works.

Trends...

You're finished!

I've played with this EA in variations over the last couple years and have a grand amount of experience with it, enough to say, stay away. The static grid application always ends each of the threads and systems based on this logic with what has been coined, the DEATH CANDLE. A single market movement that turns accounts into ashes.

Blind guesses are exactly that. BLIND!

How far will market move before it retraces?
How far will it retrace when it does?

It is a bad logic as applied to a cost average system, to the point that it no longer is a system, but a fingers crossed approach to markets. Hope won't float this boat!

When you talk about Martin, do talk about it with use of hard stops or as a way to mitigate DD.

As you know, some of us here at the factory do not use stops.

The use of hard stops for profit and loss is a single application and probably the closest thing to an actual True Martingale system as was originally conceptualized.

Think of it like this, JMN...

You are at the casino...you are playing the Martin as Applied to Roulette, betting on RED or BLACK.
You drop down a tenner on red...you lose.
Your second play would be to drop down 20 on red, so that if it wins, you have covered your first bet as well as prospered by the difference of the 2 plays.

As applied to Market.

You take a Long, .1 per pip, 10 pip stops on both sides.
Your first trade gets stopped out at -10, you've just done the same thing as betting on red as in our casino scenario...so, what would be the natural progression?
.2 per pip, you are still taking a Long, and you are still looking at 10 pips on both sides. If you win this trade, you've covered the losses on your first trade, and prospered by the difference of the second...you've made the 10 bucks you'd set out to do in both cases.

This, would be a true martingale system.

I too am one who prefers to not use Stops, but rather market ranges.

These ranges will change by way of the time frame traded as well as the amount of positions can be increased or decreased depending on risk appetite and the size of the account.

The idea of playing with market ranges as applied to a methodology is basically to dictate that you would be long, until short and short until long, seeing as close to 100% of the available market time trading the same instrument over and over...As applied to the fast charts, could happen a couple of times per hour...as applied to the longer charts, could happen a couple of times per week, as applied to the day charts, maybe a couple of trades per month.

The size of the risk will increase to the range and frame of the chart...but so will the rewards. Nobody scalps a daily chart for 5 pips...in a lot of cases, swap and commissions would chew through this madness fast.

Hitting the 5s for 5...reasonable expectations...

Have you found that certain pairs support Martin better than others in your EA research? For example, EURGBP has a tight range, albeit a ridiculously high pip value, whereas GBPNZD can easily move 100 pips in one direction in a day. That's getting close to prop info, so if you don't want to answer that, it's cool.

I'm not sure that any single pair can be deemed any better than another, but I personally stay away from the NZDs...I just don't like em!

The trade logic of the system may be more of an answer to this question than the actual pair being traded.

You've seen the performance of Voodoo...

A big part of it's overall successes comes from the fact that it plays over multiple time frames, increasing the range of profit. Along with this, the idea of setting in no increment to be a millipede(esque) trader, an incremental add, or having the option of a multiplier. In this, the comparison of time frames, the filtering systems and the minimum range between trades can all be factors.

This as well as the weekly cycles, relevant press and immediate global events can turn any system and any currency into the stuff, if found on the bottom of your shoe, would force you to throw the pair out...

Most recently, I have been trying to balance a trend for the counter trends.

Working with dynamic ranges, turns out to trade like the average trader...it cuts losses on signal as a means of taking profit as well as takes profit on ranges in trend the same way.

Trend changes can have an impact on these ideas, but in my opinion, are a lot safer methodology to apply.

VS an equity curve that consistently goes up from lower left to top right, with the inevitable death trade, my equity curves on these martingale systems look a lot more like the following.

Several pairs in trade, a marginal sized account...attempts at trends more than counter adding on signals...Still, works in progress...

Hi Magix. Just my 2 cents. I sometimes use this technique within my trading strategy, although I have bent the rules to fit my needs. I never, ever use this technique on the first trade, but it is useful as I add trades when building a position. I do trade with stops and on trade 1, if things don't go according to plan, I am out. But as I build a position, I can use this technique to "fix" a mistime entry, or to take advantage of a deeper pullback than planned as a pair reloads during a sustained move. Think of it as exposing profits in a position to the "Martingale risk", using risk to focus on deeper profits, rather than using elevated risk to reach B/E or a slight gain.

IMHO, for those who can't trade for profits, using Martingale is very dangerous. As previously stated, this is an advanced trading technique.

martingale is neither a strategy, nor a technique, it´s just gambling. NO professional trader gambles. want to have fun with martingale? go to the casino and play roulette, betting on the same colour. at best, the expaction-value is zero in a fair game. it´s funny that especially people who are talking about rigged markets believe in martingale - the safest way to blow your account. E (X) < 0.

edit: references for those without an academic background
david williams: probability with martigales. cambridge university press, cambridge 1991
y.s. chow, h. teicher: probability theory: independence, interchangeability, martingales. springer, new york 1997

I am not advocating martingale but I laugh at people debunking it with probability papers.

There is not a single chart pattern, indicator etc. proved to be profitable on the long term or proved to be statistically having an edge.

Then why do you look at charts? And don't come to me you should be taking only the best trades or filter the losers. If you are capable of doing that you can filter bad trades and manage a martingale too.. At the end martingale is a money management approach not a trading system.

** I have an engineering degree and have the necessary background, thank you.

you´re welcome - ever read a book about martingales, or game theory?
trading is about probabilities - nothing else.

You didn't add anything to what I've just said. How do you trade? Do you use chart patterns, or indicators? Do they have statistical edge or by filterin subjectively you try to make them work?

Martingale is not a trading system, it's a money management technique. Thats why you can use it with any system. It just changes how much you risk on a trade. It has nothing to do with trading.


** Have you build a dam or a bridge? You are living on and using structures based on my probability calculations. Especially my field which is hydraulics.. or foundation of a building is all about probability because the soil is not homogenous.. just saying..

.. and I studied exponential curves I don't need to read a book about it thank you.

Not a strategy...true.
Not a technique...well, since adding to a mis-timed trade is an approach to trading a developing opportunity, yes it is a technique. For those who don't understand how and when to use it, it is a tool that can badly damage your account.
No professional trader gambles...this is true.