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Does the martingale system really work?

  • #521
  • Apr 14, 2014 12:10am Apr 14, 2014 12:10am
Quoting Kiads
{quote} Not for all longterm trading professionals.. I help design simple rule for my friend that work as fund manager for one of the biggest pension fund in my country. he work with 30 Mil $ capital, the main purpose is not for trade just like intraday trader do, but for investment and save their capital asset. they deal with one of biggest australian bank, without leverage of course. the rule is simple 1. never open short position, just open long position. 2. only open first long position bellow instruments parity. 3. only open long position...
I understand your example and this is more a multiple level setup then a martingale set up. With positive swaps he continually with TP makes profit. DD is limited to the highest high if he was ever dumb enough to place a trade there. I assume he also has the ability to Hedge if something crazy happened like an H bomb going off. Funds like these only need to return 10+% a year and investors are happy. So yes the idea you present is workable. Another Hedge fund I have read about is all his trades are hedged at 100 pips. So everytime price moves up or down he collects 100 pip profit. His DD is permanent and he uses very low leverage like 2:1 or 3:1. With a 30 Million dollar fund he can put 90 Million into play. Since everything is hedged and he plays very low leverage his swap costs are negligible compared to the profits he makes. With large funds you can do these things. Actually you could do this with any broker that allows hedging and 10,000 dollars. The eur/usd lifetime range from lowest to highest is around 8500 pips. You dont buy in the top 10% and you dont sell in the bottom 10%. You profit every time price moves up or down 100 pips and your DD is permanent as far as percent of an account. You could play .01 lots or dimes and every time price moves 100 pips you deposit 10 bucks. 1 or 2 of those a day as an average makes you 50-100 bucks a week or 2500 to 5000 a year or 25-50% of your account. People simply donot comprehend what you can do with hedging and multiple level trading. As your account grows every 10K you change your lot size bigger by .01 or ten cents. Hedging can be very profitable and you are never in position to lose your account. Problem is too many traders trade too high a leverage and too high lot sizes to make it work. They laugh at a 10 dollar profit on 10K account but you know DD does not compound but profits do. In 5 years time you have a beautiful retirement account to live on.
  • #522
  • Apr 14, 2014 1:12am Apr 14, 2014 1:12am
are you supposing that everyone get the 2008 buy-at-bottom-chance everyday???

since your calculation is really off, looking to me. for 10$ per day, you need to have say 1 lot audjpy, for example, don't you?

Quoting nanningbob
{quote} They laugh at a 10 dollar profit on 10K account but you know DD does not compound but profits do. In 5 years time you have a beautiful retirement account to live on.
  • #523
  • Apr 14, 2014 1:31am Apr 14, 2014 1:31am
Quoting charvo
are you supposing that everyone get the 2008 buy-at-bottom-chance everyday??? since your calculation is really off, looking to me. for 10$ per day, you need to have say 1 lot audjpy, for example, don't you? {quote}
NO ............... 10 cents x 100 pips is 100 x .10 = 10.00 x 2 a day = 20.00 x 5 days a week = 100.00 x 52 weeks = 5200 or 52% of the account of 10,000. Some days you will get more some days less because you profit on every swing of 100 or more no matter which direction it goes. One win a day is 2600 or 26% of your account. Your positions are always hedged so you cant blow your account. You have a permanent DD that eventually gets fixed at a certain number and you continually build your account. Eventually you can build your account to lower and lower leverage until you dont need leverage. When you get to the extremes of a currency's range you dont keep or place buy trades at the top or sell trades at the bottom. If you have a 20K account and use dime trades you can earn 12-25%. You then become a hedge fund manager and enjoy a good living and your clients will love you as you keep your ratios in place. This works really well with currencies that have very low swap rates. usd/jpy would be a great pair
  • #524
  • Apr 14, 2014 3:01am Apr 14, 2014 3:01am
Quoting Rap Skallion
{quote} I like that term: "The Death Trade": Whatever system you use, identifying and removing the trades that rob you of profits is crucial to your system. People fall in love with a certain trading pattern of behavior, and use it again and again, leading to their certain demise. In the martingale, this can happen more quickly than in many another system. (That is why I avoid it.) As long as you are ready, willing, and able to buy your way away from margin call, this may work for you big time. Going Long Aussie and with the swap, and avoiding going...
Nice idea but isn't the carry gain wiped out by the spread?
  • #525
  • Apr 14, 2014 3:15am Apr 14, 2014 3:15am
Quoting charvo
are you supposing that everyone get the 2008 buy-at-bottom-chance everyday??? since your calculation is really off, looking to me. for 10$ per day, you need to have say 1 lot audjpy, for example, don't you? {quote}
I think I got the idea of the method. This is a lifetime long trading plan. The idea, as I understand it, is to grid every 100 pips with a pair of hedged positions so you're never exposed.
At each level you make sure you have a buy and a sell. If one is in profit the profit is +100pips. You close it and reopen the same. Personnaly I think this is wierd to close a position to re-open the same immediately... but that's the way I understand it.
You'll have a quadratically increasing loss and a linearly increasing profit. You keep the losers running and you bet the mean reversion over the years. You may be in the net loss during several of the first years... That's a commitment!
For example A/J has been in a range of 5600 pips for the last 10 years. If you were unlucky to open a buy at the top, you would have been in the loss by 56 levels times 100 pips. Well know formula 1+2+3+4+...+56 = 56*(56+1)/2 = 1596. You size to tolerate 159600 pips permanent DD. You add the maximum margin requirement. For 112 positions (56 longs and 56 shorts max), $5 per microlot you get $560 (adapt to your broker). With a microlot account you need ~16K. BoJ monitors the JPY doesn't get too strong which may help.
Swap is always negative because you hedge.
I don't really like the O(n^2) loss for O(n) profit. 7bit's snowball for instance has the opposite O(n^2) win vs O(n) loss
I would try and find a way to avoid closing and re-opening immediately as well. Trailling the SL of the winner perhaps? You would no longer have exactly 100 pips profit but the opportunity to get (potentially) quadratic winners.

EDIT: I don't know if this is a martingale per-se
EDIT: This is not trading but investement.
No greed. No fear. Just maths.
  • #526
  • Apr 14, 2014 7:59am Apr 14, 2014 7:59am
Quoting stewrigh
{quote} Nice idea but isn't the carry gain wiped out by the spread?
Yes it is the first day, but every day after that the carry is given you. The spread is charged only once.
--This better not be the only egg in your basket--


If you wait until the market price indicates it is coming your way, that is not Martingale. It is just another trade, to be judged on its own merits. Doubling down when the price is going your way makes simple sense as long as you the equity to do so, whether the trade is entered below the first entry, or when the entry is in profit. The question, the only question, is "is price going to go my way?"
  • #527
  • Apr 14, 2014 8:13am Apr 14, 2014 8:13am
Quoting stewrigh
{quote} Nice idea but isn't the carry gain wiped out by the spread?
Yes it is the first day, but every day after that the carry is given you. The spread is charged only once.
--This better not be the only egg in your basket--

Doubling down when the price is going your way is not Martingale. It is an independent trade, to be judged on its own merits.

Whether your previous trade is still in loss, or whether it, too is in profit, the only questions should be, is this trade going to wind up in profit?, and do I have enough equity to do this entry in comfort?
  • #528
  • Apr 14, 2014 10:22am Apr 14, 2014 10:22am
Always hedged? then how can you get swap income? you will be paying swap cost everyday if you always hedged?

and according to your description, there's interruption to winning postions(you exit winners, and re-enter), but the losers are just continously running, this, in long term, will make losers bigger and winners smaller, and it will fail.

btw, Bob, have you tried this? or trading it now this way? I'd rather not bother to talk/describe how it confuses me. I'd just say I tried it and I cannot make it work and I don't think anyone who has not an edge in predicting market can make it work. ---- then it ends up same question, if one can predict market with an edge, he needs no such strategy.

Quoting nanningbob
{quote}Your positions are always hedged so you cant blow your account. You have a permanent DD that eventually gets fixed at a certain number and you continually build your account. .......... You then become a hedge fund manager and enjoy a good living and your clients will love you as you keep your ratios in place. This works really well with currencies that have very low swap rates. usd/jpy would be a great pair
  • #529
  • Apr 14, 2014 11:05pm Apr 14, 2014 11:05pm
Quoting charvo
Always hedged? then how can you get swap income? you will be paying swap cost everyday if you always hedged? and according to your description, there's interruption to winning postions(you exit winners, and re-enter), but the losers are just continously running, this, in long term, will make losers bigger and winners smaller, and it will fail. btw, Bob, have you tried this? or trading it now this way? I'd rather not bother to talk/describe how it confuses me. I'd just say I tried it and I cannot make it work and I don't think anyone who has not...

I cant hedge in the USA but yes I have demo traded this before the hedging ban. What happened was the bouncing of price up and down made more money that the slowing increasing DD and swap costs (people get all uptight about this but it is small if you trade low leverage) some people just cant get into their heads that swap costs are the interest you pay on the borrowed money you use to trade. The more you borrow the more you pay. The less you borrow the less you pay. You leverage 400:1 yes you pay big on swap, you leverage 10:1 it becomes minimal. So quit with the swap crap. Everyone who talks about swap costs have high leverage accounts. I use 25:1 so it doesnt become part of my trading decisions.

If you have any kind of trading experience then look at the monthly charts you can see where the highest highs are and the lowest lows. DONT BE A DUMMY you dont buy in the high areas, you only sell, you dont sell in the low areas you only buy. You leverage the middle and price constantly moves back and forth there. You dont wait years for profit because you only have trades where you started. If you look eur/usd you have a range of 3200 pips over the last 6 years. So you have a max of 32 hedged trades but literally hundreds of TP during this time. So your DD is fixed at 32 trades and you have pocketed hundreds of profits as price moves up and down. So yes I have tried it and it does work profits were immediate.
  • #530
  • Apr 15, 2014 4:42am Apr 15, 2014 4:42am
Quoting nanningbob
{quote} If you have any kind of trading experience then look at the monthly charts you can see where the highest highs are and the lowest lows. DONT BE A DUMMY you dont buy in the high areas, you only sell, you dont sell in the low areas you only buy. You leverage the middle and price constantly moves back and forth there. You dont wait years for profit because you only have trades where you started. If you look eur/usd you have a range of 3200 pips over the last 6 years. So you have a max of 32 hedged trades but literally hundreds of TP during...
Yes Sir, we called that ' seeding and harvesting'
MTH
  • #531
  • Apr 15, 2014 5:57am Apr 15, 2014 5:57am
Quoting charvo
Always hedged? then how can you get swap income? you will be paying swap cost everyday if you always hedged? and according to your description, there's interruption to winning postions(you exit winners, and re-enter), but the losers are just continously running, this, in long term, will make losers bigger and winners smaller, and it will fail. btw, Bob, have you tried this? or trading it now this way? I'd rather not bother to talk/describe how it confuses me. I'd just say I tried it and I cannot make it work and I don't think anyone who has not...

The assumption here about losing positions is that they always keep losing. The actuality is that many of these positions will come back into profit if you but give them time. The spread guarantees that every trade starts out in loss. Your job is to ascertain if it will come back into profit in the near future.
The fascinations most people have with the swap simply does not hold with many pairs. It is not large enough to make a difference in total profitability.
That being said, the swaps with the aussie in the pair are very large, enough so to make it feasible to go only with the swap, or simply when it turns against you, to wait. The Aussie will come back into profit. You do not have to take such large positions in it that you will be bankrupted before it does come back.

Conversely the swap always goes against the swiss franc. To do anything other than buy the audchf ( or just stay away) , is folly, rewarded only if you are lucky and only on very short terms.

The real question to this thread should be "are there systems more profitable than the martingale?". If so, why use it?

If you hedge by entering trades in highly correlated currencies, you stand a significant chance of profiting in both. (You do not have to put the hedge in until the pair is going your way, of course.)



The other pairs are highly interrelated, and you can always find one pair involving one of these currencies going your way as the swap goes your way.
These are the ripe plums, when your indicators say to buy. Let someone else buy the green bananas.
  • #532
  • Edited 11:51am Apr 15, 2014 11:33am | Edited 11:51am
Quoting Rap Skallion
The assumption here about losing positions is that they always keep losing. The actuality is that many of these positions will come back into profit if you but give them time.
Suppose you had sold EURUSD on Oct 22, 2000. Today, 13.5 years later, you'd currently be ~ 5600 pips in loss and your account would have had to survive an adverse swing of ~7800 pips. I'm not sure whether you would have gained or lost swap throughout that period, but if we ignore swap, there was no opportunity along the way to close out at breakeven. Not to mention that you've tied up capital that could have been used in hundreds of other opportunities.

Sure, that's an extreme example, and I agree with you that price does eventually return to any given level. But my point is that you never know how long you'll have to wait, or how far price will move against you in the interim (and therefore how small you need to size your position, in order for your account to survive).

Quoting Rap Skallion
The fascinations most people have with the swap simply does not hold with many pairs. It is not large enough to make a difference in total profitability.
But the longer you keep positions open, waiting for them to return to breakeven — just like you're suggesting — the more swap that accumulates (either for or against you), and therefore the more significant it becomes.

Quoting Rap Skallion
The real question to this thread should be "are there systems more profitable than the martingale?". If so, why use it?
That's true if you don't care about losing your entire account.
  • #533
  • Apr 15, 2014 12:12pm Apr 15, 2014 12:12pm
Quoting charvo
Always hedged? then how can you get swap income? you will be paying swap cost everyday if you always hedged?
If you're saying that hedging in the same pair is nonsensical, then I agree. There is no difference between being hedged, and being out of the market altogether (because the hedged positions cancel each other out), except that if hedged you pay more swap (because br0kers charge more swap than they pay out). This topic has been done to death on other threads, and I've no wish to demonstrate all over again how hedged positions can be replicated by a single net position. To anybody who is willing to view the scenario with an open mind, Merlin (and others) explain it well in this thread.

Ultimately, the crux of the matter is whether people view floating losses as tangible or not. IMO they are (reasons in in myth #7 here).
  • #534
  • Edited 3:05pm Apr 15, 2014 2:53pm | Edited 3:05pm
Quoting hanover
{quote} Suppose you had sold EURUSD on Oct 22, 2000. Today, 13.5 years later, you'd currently be ~ 5600 pips in loss and your account would have had to survive an adverse swing of ~7800 pips. I'm not sure whether you would have gained or lost swap throughout that period, but if we ignore swap, there was no opportunity along the way to close out at breakeven. Not to mention that you've tied up capital that could have been used in hundreds of other opportunities. Sure, that's an extreme example, and I agree with you that price does eventually return...
1: absolutely true. If I had nothing in play to stop this, I would be sorely remiss. One must not allow the debt one incurs to become the ruling element in the trades.
fortunately I have something in place. just have not discussed it here.
2: what I am referring to here, are the pairs that can go for days without showing a swap of any kind. I vastly prefer to trade with the swap, but that is not sufficient for me to enter the trade.
3. I think that using Martingale system is an example of ignoring floating losses, and a very popular way to wipe out your account, where ever you try to use it.
The classic Martingale system has been discredited for nearly a century now. If you have the resources necessary to enable you to have any chance on a system like this where the long term odds are against you, you can more profitably use them on many other systems.

It's a classic ploy used by dishonest brokers trying to sell you a losing stock. "You thought it was a bargain at two dollars, didn't you? Well now, at one dollar it's a real bargain then".

"Hedging" in correlated pairs is not the same thing as hedging in the same pair. (Not really hedging). They should be entered as you would totally independent trades, Not entering a losing trade to "help" another.
For me the question is, will they move toward profit in a weeks time. Longer than that, they become unpalatable, and I rid myself of them: this usually frees up margin so I can go after the most likely looking trades. I may look at nineteen pairs, but I only trade actively in the most attractive four, or sometimes five.
  • #535
  • Edited 5:34pm Apr 15, 2014 5:04pm | Edited 5:34pm
Quoting Rap Skallion
"Hedging" in correlated pairs is not the same thing as hedging in the same pair. (Not really hedging). They should be entered as you would totally independent trades, Not entering a losing trade to "help" another. For me the question is, will they move toward profit in a weeks time.
Multi-pair hedges, baskets and rings can all be resolved into simpler positions. As a simple example, if you're simultaneously long EUR/USD and short GBP/USD, that's effectively the same as being long EUR/GBP (if the EU and GU positions are suitably weighted). Hence the hedge itself provides smoke-and-mirrors complexity rather than an edge; if you are profiting, it's not actually from the hedge, but your ability to forecast the imminent direction of the pair(s) that your hedge resolves itself to.

I posted some examples here and here.

[EDIT]
In reality, it's more complex than the way I described it, because the crosses (e.g. EURGBP) are effectively 'synthetic' pairs, and it's the movement of majors like EU and GU that largely determine the price of the crosses, as triangular equilibrium (EUR/GBP = EUR/USD x USD/GBP) must be continuously maintained.
  • #536
  • Apr 15, 2014 6:38pm Apr 15, 2014 6:38pm
Quoting nubcake
{quote} I'm telling you that you sound like a complete idiot and are speaking a lot of bullshit that look like sentences but which fail to meet the criteria of "things that make sense to sane semi-educated people". It seems to me that you are just making shit up in the hopes that someone, somewhere, will nod their head and go "hey you are so right!", and thus validate your fucked-up notions on a broad range of topics. I'm sure if you keep at it long enough someone will finally give you that validation. Until then you will just have to rest your...

ok troll lol, thanks for sharing an intelligence analysis of what it is Im saying in regards to binary options, which you clearly have no idea, what they are!!!!
Learn, a forex trader must, unlearn and relearn he will.
  • #537
  • Edited 7:23pm Apr 15, 2014 6:52pm | Edited 7:23pm
Quoting hanover
{quote} Multi-pair hedges, baskets and rings can all be resolved into simpler positions. As a simple example, if you're simultaneously long EUR/USD and short GBP/USD, that's effectively the same as being long EUR/GBP (if the EU and GU positions are suitably weighted). Hence the hedge itself provides smoke-and-mirrors complexity rather than an edge; if you are profiting, it's not actually from the hedge, but your ability to forecast the imminent direction of the pair(s) that your hedge resolves itself to. I posted some examples here...

I think you describe my thing in different word, but to the same effect. I think you are someone worth listening to: I have subscribed to you>

Okay , I call it hedging but I enter each pair independently without look at the other. It's hedging only in the sense that my trades in one pair are unidirectional and designed to offset trades in another pair. I have a chart that I use: When I see that a pair is begining to move, I check its "Parents": E.G. if I see that euraud is moving up, I check eurusd and audusd. If they are moving the correct way, I know I can enter the euraud with greater confidence, since the parents are "Pushing" the euraud. Each pair has many such parents, and they form a network interlocking the major currencies with their derivative pairs.

To enter a pair just because you have a play in a correlative pair in play is not really valid. Yes, there is a lot of smoke and mirrors to call this a "hedge".
  • #538
  • Apr 15, 2014 10:18pm Apr 15, 2014 10:18pm
Quoting hanover
{quote} Multi-pair hedges, baskets and rings can all be resolved into simpler positions. As a simple example, if you're simultaneously long EUR/USD and short GBP/USD, that's effectively the same as being long EUR/GBP (if the EU and GU positions are suitably weighted). Hence the hedge itself provides smoke-and-mirrors complexity rather than an edge; if you are profiting, it's not actually from the hedge, but your ability to forecast the imminent direction of the pair(s) that your hedge resolves itself to. I posted some examples here...
I agree it is a bit of a simplification but the gist is correct: multi pair hedges can be resolved more simply given suitable weights. Mathematically EG = EU / GU. However, when we buy or sell we can only add or subtract. Through triangular arbitrage the sizes can be "suitably" fixed to hedge nearly perfectly and this hedged position will hold up over time (if desired).

But in many cases traders are simply trading equal lots (or something other than a perfect hedge) of EU vs GU. The results of this can be quite different from just trading EG. Most notably, the volatility is quite a bit higher in EU-GU vs EG, but as shown in the link, the volatility of the synthetic EG can be altered quite dramatically by changing lot sizes in EU and GU from 1.0 to 0.6, for example.

As an aside, if positions are only taken in the synthetic EG, as the price of EG drifts, the sizes of synthetic EG (EU - GU) need to be adjusted if a perfect match to the cross EG is required.
  • #539
  • Apr 16, 2014 3:34am Apr 16, 2014 3:34am
Quoting COGSx86
{quote} ok troll lol, thanks for sharing an intelligence analysis of what it is Im saying in regards to binary options, which you clearly have no idea, what they are!!!!
You are welcome. Please continue to embarrass yourself.
Congratulations ScalaFX for coming out of the closet!
  • #540
  • Apr 16, 2014 5:04am Apr 16, 2014 5:04am
Quoting FXEZ
{quote} I agree it is a bit of a simplification but the gist is correct: multi pair hedges can be resolved more simply given suitable weights. Mathematically EG = EU / GU. However, when we buy or sell we can only add or subtract. Through triangular arbitrage the sizes can be "suitably" fixed to hedge nearly perfectly and this hedged position will hold up over time (if desired). But in many cases traders are simply trading equal lots (or something other than a perfect hedge) of EU vs GU. The results of this can be quite different from just trading...
This interesting observation is to me a reason why cross currency hedging should be that in name only. Ideally you enter a pair, watch it go into profit, take the profit, then go to its complementary opposite when the pair goes the other way. That pair is very likely to go into profit. Check your indicators, if they say enter, do so with greater confidence.

Really all you are doing is trying to catch a profit from a major currency going either way.

I never trade against the swap: that means the Aussie is exempt from this procedure. That is a pure carry trade. Ditto the chf: I sell it only, when conditions are good to do so.

What does this have to do with martingale? It kinda sorta looks like it if you squish your eyes and don't think too hard, but really not.
What does this have to do with hedging? Ditto.

I tend to follow the remarks of guys who have been in this seven years or more longer than I have carefully, with interest.
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