I recently had occassion to hear a talk by an ex-institutional currency trader who was talking on trading psychology. Anyway after rambling on for 28 minutes about how much money he made for his bank, he went on to reveal one of his secrets to all the eager newbies. He emphasised the importance of pushing your winning streak and said that after each winning trade he would double up his position size and keep doing this until he hit a loser and then every subsequent loser thereafter he would half his size and keep doing it until he hit a winner. I now question whether this joker has actually ever traded or was deliberately giving out terrible advice.
There is some merit to what he says. There was a famous professional craps player from some years back that did the same, really pushed his luck when it was in and cut back dramatically when losing. The secret to his success was all about using the streaks, both ways. One to make the other to conserve. If you think about it with a game like craps where the house always has the edge, pushing your luck is the only way to make it pay. Most though, would turn say $100 into $500 or $1000 and run with that score, but I'd assume this fella would try to push it to $5,000 - $10,000+. The risk of that of course is you go to $4,000 and then in an hour walk away with $200 or less.
The Dice Doctor was his name by the way and he wrote a good book for anyone interested in craps/gambling and that way of life. Don't know if it's still in print but if it is then the Gamblers Book Club (if that's still in business) in Vegas will sell it.
Actually, he sounds like a pro to me. This is an anti-martingale approach pros often use. It is half of the story though but a correct half. The other half is having a strategy that guarantees streaks of winners and small number of consecutive losers. This is similar to what optimal %Kelly does. If equity increases the bet size increases and if its drops it decreases. Optimality is along these lines. The opposite technique, martingale betting, is catastrophic for trades.
should he/she be added in this list? http://www.elitetrader.com/vb/showthread.php?threadid=212110 scam list. Sounds like he is lying. Plus, when trading at a bank, the bank makes their trader signed a non compete disclosures. Pretty much he/she was scamming
... No money management strategy can turn a loosing strategy into a winning one. It can at best break even (-> bet $0 i.e. don't play is the break-even strategy). And also Gambler's fallacy... Ninna
Averaging up is good advice. Not sure about doubling positions. That means the biggest position is on when your wrong. Liquidity isn't deep enough for billion+ dollar funds to go all-in on the first position. They have to leg-in their directional bets. That can only be accomplished during trends, where price allows cumulative directional bets to be made. In fact, this is one reason why trends exist - big money adding positions as the market moves in their direction, which pushes the market further. Livermore averaged up. In fact, it's good practice because it means the smallest position is on when you're wrong and the biggest position is on when you're right.
I might not have explained clealy. What this guy was suggesting: say for a winning streak of 5 successful consecutive trades: trade 1: 1 contract trade 2: 2 contracts trade 3: 4 contracts trade 4: 8 contracts trade 5: 16 contracts so as you see, trade 6 (or whatever, because eventually a losing trade has to come) will be 32 contracts. i.e you have largest position size on when you hit a losing trade. Conversely, after a streak of losers, you have your smallest position on. To my mind, only someone who has never traded real money would suggest such a strategy which is why I was surprised to hear this from a supposed ex-institutional trader.
When you're doing well you should press your bets. Any trading coach/psychologist will tell you this. Raise your size when you're doing well and cut your size when you're trading at your worst. Unfortunately, most traders do quite the opposite when they're trading at their worst. They increase their size to try to make back the money that they've lost as soon as possible BUT b/c they're trading poorly, they end up losing more.
I can see how that might work...if you periodically reset your betting counter. Otherwise, how do you not come out on the losing end? T1-5 = 1, 2, 4, 8, 16 = +31 T6 = Loser = -32. Total = -1 At the end of every doubling run, you are down -1? Say you reset after 4 wins...then you could even have fairly lengthy losing streaks and still come out ahead. It'd take some strong psychology to operate this way, in my opinion.