For example if you had an account that had 1X equity you can hold a position that is 50X equity at the maximum, something you would want to avoid in the simplest terms. So instead of making your first lot size 1X or 10X and then making the second one 2X or 20X you make the first lot size 0.1X so that the second position is 0.2X. If you spread out your prices so you only “double” when it goes down more than 1% you’ll have extremely high probability to make a profit eventually; as long as you don’t liquidate an aggregate position for a loss.
I heard a story about a man who played chess against the Emperor of China.
The Emperor made a bet with him that from a single grain of rice on the first move, each move would double (1,2,4,8,etc…).
He ended up owing the Emperor all the rice in China…
It doesn’t work because you need to start with an infinitesimally small % of capital to risk, just to survive a string of draw downs.
Even risking 0.001% only allows a trader to lose around 17 trades before going bust. A trader can definitely lose more than 17 trades in a row and 0.001% is definitely not enough risk to make any money.
Most people want martingale to compensate for bad trading or bad trades. Nothing can compensate for bad trading or bad trades. A person needs to learn how to trade and to stick to a static risk, consistent trading plan. Allowing that consistency to recover losses.
To the honest view point, it can be a destruction for the forex traders. A trader will require a proper trading plan that can actually help him in achieving trading goals. But in case of selecting your strategy you must be cautious since martingale will possess equal profit and loss opportunities. Thereby won’t hesitate to go for other methods specially in the earlier stage of career.
I think that I have previously heard somewhere about Maringale strategy but it was connected to story of Roulette, or something like that. Considering that it implies on gambling I have immediately dismissed it. It sounds too risky and I don’t gamble
I don’t know anyone who uses a Martingale strategy and survived. You can test it for yourself by flipping a coin and seeing how long you last before going bust.
Having said that, an ANTI-Martingale strategy can work. With this strategy, you decrease your risk after every loss, and increase your risk after every win. The idea is that if your trading method is in tune with the market and you’re consistently winning, you can rake in more profit than usual. And conversely, if your trading method is out of step with the market and losing you money, you decrease your risk until your losses trickle to almost nothing, protecting your account.
Have you given this a try yourself with any success? I imagine if you continue to lose, you protect your bank roll and eventually realize maybe something in your strategy is not working as it should be.
I heard rumblings of this along with gambling as well.
I’ve been doing it for 4-5 years. I keep track of my drawdown and base my position sizing on that. Greater drawdown = smaller position sizes. I trade at my maximum risk (2%) once I’m making a new equity high.
Interesting strategy. Does that mean it takes longer to get where you were, before the recent drawdown? Why not simply keep it at 2% all the time? Perhaps that depends on how many open trades you have?
It does take longer to recover from a deep drawdown, but it’ll protect you from losing all of your capital.
You can keep your position size constant. It’s just in my experience, once you’re in deep drawdown, you’ll begin to question your confidence and divert from your trading plan. By reducing your position size, all that negative emotion becomes easier to control. Getting punched in the face repeatedly isn’t fun, but you can reduce the pain by trading smaller. Trading is also a long-term pursuit. Survival is #1. You can’t trade with a blown-up account.
Right. Something to always keep in the back of my mind. It doesn’t happen all at once in a single day or single trade. It’s hard to remember that at times, when you’re in a trade.
This is outstanding. Sounds like you must have modified Martingale in some important way - a true Martingale system doesn’t use any money management at all (apart from the first position being very very small I suppose).