This will only stay afloat until such time that volatility overtakes the average volatility. It will also not work in a "thinner" market and assumes that there is always someone to take th other side of your trade. Besides the fact this it is not scalable to making the real big money. Another system dreamt up by some quants types and not in touch in what market reality can, and eventually will, bring. Look at where the "hedging" of the banks with derivatives brought the economy. Options /derivatives trading only works in a slowly decreasing volatilitiy and once when volatility increases it just blows up. So will the trader who trades this system: one day it collapses. Maria
Appreciate your feedback. I Agree this method will not make big money in any single trade. Hedging OTM options while trading the underlying simply reduces exposure over 3 -5 strikes of movement. Instead of taking a $10K hit on a single tradeset we take $3K on the chin but the counter tradebot covers the loss and gets us out at break even or with a small profit. Like I had indicated this is a hybrid martingale - 54 cars algorithmically scaling in and out of trades. Managing exposure and trading risks associated with the max contracts over a 50 point range. 90% of the time our open positions are 6 or less cars. Our objective was never to pull big money trades but to manage runaway risk and consistently make profits. We take lots of small profits and do what we can to control and minimize losses. Avoid runaways/ blow-ups and Live to trade another day. ES is liquid and we like volatility... we need price action and swings to trade. We use to trade ER2 with the same system. Use tweaked versions for currency futures. Currency futures have different price action versus indexes futures and their Options spread change the hedge a little. NQ and YM trade OK but are thin to fill 18 - 54 cars. Our workaround was to pseudo iceberg adds and exits into smaller sets... PITA... Thin markets are tricky as you get partially out and have to reset your position based on what you have left. Quant Maybe... No doubt theres a lot of math... more along the lines of cruise controlled trade execution.
your thinking is directly in line with your handle - in contrast we are not interested in pocket change because one day your pocket gets picked and you are left with nothing. risk is just too high - I see more flaws in your approach and the more I look at your post the more I am convinced I am right. M
Really thanks very very much for all the replies.. much appreciated. I am reading all the replies and as a starter I could not understand few technicalities and I hope this discussion will be helpful to many others as well. My a/c is small and I was thinking of trading NQ but of course the clear message is NO. I thought for a starter there could be someway to protect and trade. and make some easy money. Ofcourse in paper trading it is easy as there is a large capital in the account Thanks again. Please carry on the input and could become a good reference point for others.
by anti-martingale do you mean doubling the position size as it goes in your favor? ie. 1 contract, + x points, add 2 more, + x points, add 4 more, etc.? That will wipe out your giant gain with a small move against you.
Even with small capital it can be profitable until... you hit that one trade that blows you. You could make money backtesting a couple months and then boom, you hit a further std dev event and your done fast.
In short: 1) A martingale money management system is one that advocating adding to losers. 2) An anti-martingale money system is one that advocates adding to winners. Hey ya know, Google is a good thing.
Theoretically, if you have a market in which your system randomly generates a positive expectancy, a modified martingale would produce consistent profitabilty.