I recently ran accross an adaptation of Martingale method. In essence it states that you should increase your betsizes after losses. Thus if your usual bet size is 500 shares and you suffer a loss, you should increase your next betsize to 1000 shares. If you loose again, increase betsize to 1500 shares. This continues until you have a winning trade. After which betsize should be set back to the original size (in this example 500 shares). To me it seems critical to be well funded for this sort of approach. Given the fact that 5-6 losses in a row are quite possible, this strategy would most likely put extreme strain on the account. Being a bit new to the markets, I was wondering if anyone was using this method? Does anyone have particular thoughts on it? -Ben
Martingale don't work in casinos. They don't work in stock markets either. This is imo the worst you can do.. It is a fact you will get several bad trades in a row. When you increase your size you just damage your account too much. If you also have large stop loss [if any] death comes quickly and swiftly.. To succeed in trading you must have an anti martingale approach. You INCREASE when you WIN. Decrease when you loose. It is counter intuitive, but any trader with more than six months experience has been in a loosing streak and probably used a martingale approach. I sure did because noone warned me then. I least I knew about capital protection [well... that should have hinted me against the martingale, but it is so 'natural' to look at it that way]. This is the short answer. I am sure my fellow traders will add more.
i absolutely agree with you, tnt. the only way to hope to have a chance to survive here is with the (small) anti-martingale strategy (eg fixed position size of 2%/equity as calculated per your stop for your opening unit size and potential further units > position size here grows and shrinks with your equity) which leads to geometric as opposed to linear capital growth, ie even a system that is *right* less than 50% of the time can be net profitable. probably the single most important aspect of trading. cheers
Also, the use of the word "bet" or "betsize" I feel is a little counterproductive, as it implies that you are gambling and might as well be flipping a coin, whereas good traders use risk management and stop management to control the outcome of a trade.
Only a fool (with an unlimited cash supply) uses a Martingale-based approach (whether in a casino or the market). Sure, if you're an Arab sheik and can keep doubling your bet EVENTUALLY you'll win and get everything back (assuming you're at a no limit table). But that puts you in the position of perhaps betting a million dollars just to win (net) a buck. Hardly the smart thing to do. In the casino, I've used an inverse-Martingale betting approach that usually works where you're basically using a structured sequence of increasing your bets in a staggered manner while you're winning. This has worked well at craps and roulette. For blackjack I still prefer to vary the bet size based on the card count. In either case, your goal is to be betting with the house's money not playing catch up. BUT, the market isn't really analogous to a craps table - although a lot of people seem to trade/invest like gamblers. The objective in trading is to cut your losses quickly and let your winners run. You profit as much from risk management/mitigation as you do from stock picking. For instance, using incremental profit taking to take money off the table as your position goes green and moving your stop accordingly to mitigate position risk. Example - you buy 800 shares of XYZ @ 40 with a 1 point initial stop (initial risk is $800 so you're capital needs to be at least $40K to maintain a 2% capital risk). Now when the stock moves to say +1/2, you dump 400 shares and move your stop to a net breakeven point at 39 1/2. At this point you have mitigated the risk of the position. If the stock gets to +1, you dump 200 more shares and move the stop on the remaining position to breakeven at 40. You have now locked in $600 in profits and have almost no risk in the remaining position. You then ride the remainder as far as you can while periodically trailing up the stop (although you may want to set another profit taking target to lock in additional profits). Obviously, the initial stop size and profit taking targets will be based on the specific analysis of the stock and especially the expected layout of it's support/resistance zones (you usually want to plan your initial stop below a support zone and plan your profit taking just ahead of resistance zones). The one analogy to a casino with this approach is that by incrementally taking profits you quickly move a position to the point where you've essentially mitigated its risk and you're playing with the "house's money". Good luck.
Martingale strategies are the surefire road to the poor house. Whenever you think you are smarter than the market you will lose. The market is always smarter. Even if you did have an unlimited bankroll you can't count on a winning trade just because you've lost so many in a row. The market doesn't care how many trades you've lost in a row. It will do whatever it wants to do. (Think of the poor people who have bought this market all the way down from last year. They're still waiting for the big winning trade. It may not come for years)! The only thing you have control over are your exits. There are only two kinds of exits. 1)Taking profits, and taking losses. If you don't take your losses then the market will force you to take them at a time you don't want to. Once you master those two things you'll be a great trader. Read Van Tharp's book "Trade your way to financial freedom". The whole book is about this concept. You can read reviews about it in the book review section on this web site.
The latest issue of Stocks & Commodities has a pretty good article on the chance of total wipeout.. I checked their site and here is the intro (first few paragaphs): http://www.traders.com/Documentation/FEEDbk_docs/Abstracts_new/vonRonik/vonRonik.html It gets better than that though.. I think its worth the time to at least cruise down to the mall and read it in the book store. One of the points is that, with proper capital management, you can stil make money with a system that is right <50% of the time. With poor management, you can also lose with a system that is right >50% of the time. I have a subscription to this mag and occasionally it has very interesting articles..
ArchAngel, respectfully disagree that by slowly legging out of position you are playing with 'house money'. This is an illusion. Actually it is your money! By reducing your position as it goes in your favour, you are actually hurting yourself. Why? Well when you took the trade you did it for a reason (whatever your edge is=reason). That was also the point where you had the most risk (that's why we have stop losses). As the position moves in your favour your risk is reduced (until you enter a break even stop loss). Why would you want to eliminate the potential gain exactly at the moment where you have less risk? I can understand if you are trading large blocks you have to execute carefully to not tip your hand (but I believe most of those on this board do not trade at levels where this is a problem....blocks of 5000-10000 shares) what do you think?
Whoa! This I have to respond to. As a position moves in your favor your risk is increased. You buy a stock @100. Your stop is 90. You are risking 10 points. If the stock moves in your favor say 110 you are now risking 20 points until you raise your stop. Yes you have 10 points of profit but there is still 20 points of risk. The further the stock move in your favor away from your stop the more risk you take unless you do something to reduce that risk such as reducing your position size or raising your stop.
The purpose of incremental profit taking is to lock in profits while at the same mitigate your risk. Suppose you enter a stock at 90 with a 5 point stop. Now it moves to 95 so you decide to adjust your stop to breakeven. Now it drops back to 90. You just walked away with a breakeven trade when you were actually up 5 points at one point. Had you taken partial profits at the time you moved to a breakeven stop, when the position stopped out you'd still have that 5 points on 1/2 the position. Since you target the profit taking just below projected resistance levels, your goal is to put some money in your pocket just ahead of a place where the price could reverse/pullback. There are multiple benefits to doing this. Obviously, if you're only trading 100 share blocks you don't have room for this. But if you're trading at least 400 shares, you can take two incremental profit takings and still have 100 shares to let ride as far as possible. Managing risk is key to success. But to be successful, you also have to keep part of your profits.