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The Martingale strategy i good?

Sep 25, 2013 at 20:49
5,009 Angesehen
135 Replies
Mitglied seit Jun 28, 2011   465 Posts
Dec 02, 2013 at 18:46
Good Morning Forexci,
May I make an observation about your post, “No-stops is a problem in itself. Most system fail miserably without having well defined stops.”

If the system used no stops then the trades would remain open. But a true martingale doubles the last loss to make the next trade, if the trade doesn't close for a loss there is nothing to double. A martingale recovery system always uses stops. It is a grid system that holds the trades open and doesn't use stop losses, they tend to use a hedge instead.

A martingale is not a trading system, it is a recovery system. If your system never lost the first trade, there would be no need for any type of recovery system. I used to work construction when I was younger and saw people getting hurt all the time misusing the tools we used to work with. The same tool that cut a sheet of plywood to make something valuable also cut 4 fingers off a man's hand. Should we stop using saws, drills and the like because there are some who will get hurt misusing them? The solution is knowing how to use the tools safely. The martingale is just a tool.

As it turns out, it isn't a very good tool, in its basic form, for trading the market, but the earlier concept has been worked with to make recovery systems that really do work. Lets modify the martingale just a little bit so you can see what I mean. This will also not work for trading but it will get you started seeing alternatives.

The problem with a martingale recovery is that the size of the trade grows too large for the traders pocketbook. But instead of doubling the trade size, double the range size. Start with 0.01 lots with a take profit and stop loss at 10 pips. If the price goes the wrong way, open the next trade with 0.01 lots but the stop losses and take profit is doubled to 20 pips. The buy or sell decision is made by always trading toward the center of the total trading range.

Here is something that technical and fundamental teachers don't teach their students, the forex is different than all other markets because it has a concept of normal. This normal usage adds an extra layer of safety, if you know what it is and how to use it.

Lets take stocks to compare to. To buy a stock, you pay currency, therefore there are two ways to make money, either the stock goes up in value or the value of the money goes down. (inflation) All other markets compare their products to a currency for the value. Forex has only currencies. And these currencies are the life's blood of the countries that use them. The banks and governments work to stabilize their currency with other countries so the other country will continue to buy their products. This means that over the years the price of any currency pair changes but the more it changes the more it stays the same, that is it remains within a range of prices that is good for that currency pair and the countries that use those currencies.

This one concept can give you a strong advantage in your trading. In systemic trading we utilize these fundamentals in a different way than fundamental traders do. For example we may face our trades to close toward center, (Between the historical high, and the historical low). The historical high is the highest price that the currency pair has reached since 2001 when the forex spot market began.

By taking sell trades on the top half and buys on the bottom, of the total trading range, eventually the price will head in the right direction (toward the center) and close your trade for a profit. Doing this effectively trims the size down making two smaller trading grids. The AudNzd has 3300 pips between the highest high and the lowest low which means there are 1650 pips between center and the historical limit.

Now lets go back to that martingale where we started with 10 pips and .01 lots. The second trade would still have .01 lots but the range size has been doubled by the martingale recovery system. Lets add up the subsequent trades and see what we get. 10 + 20 + 40 + 80 + 160 + 320 + 640 + 1280 pips in 8 iterations for a total of 2550 pips. But there are only 1650 pips from center to where the price has ever visited so the probability that the price will close one of those 8 trades for a profit before it goes almost 65% further from center than it has ever reached before is almost a certainty.

There are further improvements on this but the point is that there are recovery systems that do work and work well. It is just the original martingale system that doesn't work very well and workers lose their fingers with.

A martingale recovery system, loosely fits into systemic trading (with modifications) but is not used at all in traditional technical trading nor fundamental systems. When you hear new traders beating up on one systems or another, it just means that they don't know how to trade that system, not that no one else can.

At 0.01 lots, each pip will cost 10 Australian cents per each .01 lot. A loss of 8 iterations (65% beyond the historical limits), is a dollar loss of 2550 times .10 or $255.00 Australian. If you have $500 in your account, it would take an act of god to crash that account. This is the main principle of money management. Traders that do not understand or use good money management strategies will eventually lose their accounts. It doesn't really matter what system they are misusing, money management is how we use our tools safely.

Hope this helps.

Bob
where research touches lives.
forex_trader_136673
Mitglied seit Jun 28, 2013   852 Posts
Dec 02, 2013 at 21:38
Great observation @forexci

Indeed martingales or grid strategies are dangerous creatures. But they are safe to use on demo accounts, once the account blows can be replaced with a new one. I wouldn't advise on real.

Every trader would like to have the holy grail. The strategy that never looses. I read a few books on the subject and on the behavior of markets. Markets are purely random on short term (next tick, next second) but on long term are 'nonrandom' (couldn't find the true word that describes) because are driven on human emotions: strongest are fear and greed.

If market was purely random, then market crashes wouldn't happen every 10-15 years. If markets were purely random then 19 oct. 1985 crash we wold have to wait longer than the age of the universe 13.7 billion years for it to happen, and it happened anyway, several times. In math that is called fat tail distribution: https://en.wikipedia.org/wiki/Fat-tailed_distribution

About new traders who martingale and grid strategies sound new to them. It is easy to know if a trader uses martingale or grid, just follow the graph (as below), balance going one way, equity in the other. It is one of them.
Mitglied seit Aug 21, 2012   47 Posts
Dec 02, 2013 at 21:59
ahuruglica posted:

Every trader would like to have the holy grail. The strategy that never looses. I read a few books on the subject and on the behavior of markets. Markets are purely random on short term (next tick, next second) but on long term are 'nonrandom' (couldn't find the true word that describes) because are driven on human emotions: strongest are fear and greed.

I believe the word you are looking for is 'stochastic'.

ForexAssistant posted:
Beren, I beg to differ sir, but the market does have a memory. Every point where the price reversed puts a resistance point at that price level until it has been crossed by a later price movement. The market is made up of traders and we all have memories, mine are fading fast because of my age but they are still there. What I know, the market knows.

I was tired of being subscribed to this thread when you responded to me a few pages back, and I'm even more tired now. However, in a possibly futile attempt to clear some of the fog in here, I'm going to try to explain my point again.

You're right that conceptually, the market does have a memory. It has a memory of *aggregate events*, made up of the aggregate memories of human traders and the calculated values of algorithms. However, the market does NOT have a memory of YOUR trade. We are not in a discussion here of fibonacci numbers or resistance points. We are discussing martingales. I'm going to repeat the thesis of my earlier post, in capital letters, short words, and a little sentence:

MARTINGALES ARE BAD BECAUSE YOU ARE BASING YOUR NEW TRADES ON YOUR PAST TRADES, NOT ON THE MARKET ITSELF.

If you are trading on market activity (your description of the market's 'memory'), that is called technical trading, and it may be a valid trade. If you are trading based on having just lost a trade, that is not in itself a mathematically sound decision as you are not able to move the markets, and the markets do not care about that trade you just lost. Your trading would be based on solid principles equally well if you made your decision based on what you ate for breakfast that morning.
forex_trader_136673
Mitglied seit Jun 28, 2013   852 Posts
Dec 03, 2013 at 07:24
Thanks @beren

English is not my native language.

By non-random I meant that the process is still random but the distribution of masses is different from a purely random process. For example if you toss a coin there is 50% chance there will be head and 50% chance there will be tail. Lets say we may make an experiment and toss the coin 1,000,000 times (50% of them will be heads and 50% tails, and the difference will be very low because the coin doesn't remember what was the last toss).

Lets treat the same way price tics as random. Most of the days the market will tick 50% up and 50% down (with small difference), but when the markets crash market will tick 90% down and 10% up, which doesn't happen in a purely random process (coin toss). Still the tick will be random because no one can predict what will be the next tick, but the distribution is not the same.

Little math geek here :)
Mitglied seit Jun 28, 2011   465 Posts
Dec 04, 2013 at 06:05
Here is a question from my e-mail that I don't get very often but as it may prove to be helpful to new traders, I am posting it here.

Dear Forex-Assistant:
….. that demos are different than a live account with money.  Is it true?  And why do you use demos for showing what your systems do instead of a real account?  ….

Hi Jain,.....
Yes, for some types of trading it is somewhat true, it used to have more of an effect a few years back than now days but if you have very quick trades such as scalpers do then you could get some small differences in the results between a live account and a demo. Demos read the input data from the live feed but doesn't tie directly into the live feed. Sometimes there are little spikes (one or two pips) that don't last even a second, those quick spikes sometimes don't show up on the demo feed.

But you are using a demo to learn and that is what they are for. We give you and others, the account number and investor password for the MT4 so you can watch what I do as I am explaining something. I would not be so ready to show examples and play with the account if I also had to be concerned with messing up a trade with real money. Long term trades like we do would have no difference between the result you get from a live account to a demo. But a lot of the people who sell these programs want to show it on a live account (it has something to do with perception in marketing). But frankly from a pure users point of view, it doesn't really make any difference.

Now a few years back, brokers took the opposite side of the trade from investors. They were called dealing desks. They also had plug-ins for the MT4 which allowed them to hold back price signals by a pip or two so they would not hit a take profit unless the price went some small distance beyond the take profit. It would also bump the price a little to hit a stop-loss. They only used them on large accounts if at all but traders would never actually put a stop losses or take profits on their trades so the brokers wouldn't be able to see when they were going to hit one or the other closing prices. With todays ECN brokers that pass through the trades to the system there is no incentive to play with the live feeds anymore so the traces of both look exactly the same.

Next time you hear someone saying there is a difference between the two, ask them how. I know the director of Lucror and if something has changed and there is now some difference in the feeds, he would have told me by now. I also know people at FXDD and IBFX, and they have never told me anything has changed so I think that you found yourself one of those wild rumors. Remember how it was spread around the internet that Mr. Rogers was a Navy Seal? If there is a difference ask how, that should help you feel better. (I know it was just a rhetorical question)......
Your question may help some other new investors/traders on a forum that I scan, I think I will repost this there for them but don't worry, I'll keep your identity out of the post.
...

If anyone else has any questions that you think I may be able to help with, just send me an e-mail and I'll try.

Bob
where research touches lives.
forex_trader_136673
Mitglied seit Jun 28, 2013   852 Posts
Dec 04, 2013 at 19:42
Would someone open a real accound and a demo account at the same time and apply the same EA. Prove once and for all is there a difference between real and demo.

It will be fun to show results here. Anyone?
RedRhino
forex_trader_149646
Mitglied seit Sep 09, 2013   471 Posts
Dec 05, 2013 at 07:53 (bearbeitet Dec 05, 2013 at 07:54)
beren posted:

MARTINGALES ARE BAD BECAUSE YOU ARE BASING YOUR NEW TRADES ON YOUR PAST TRADES, NOT ON THE MARKET ITSELF.

If you are trading on market activity (your description of the market's 'memory'), that is called technical trading, and it may be a valid trade. If you are trading based on having just lost a trade, that is not in itself a mathematically sound decision as you are not able to move the markets, and the markets do not care about that trade you just lost. Your trading would be based on solid principles equally well if you made your decision based on what you ate for breakfast that morning.


In order to apply martingale successfully to a strategy the technical aspect must override the martingale mentality of entering after a loss. It would then be called a Collapsed martingale Grid that follow your outlined post.
RedRhino
forex_trader_149646
Mitglied seit Sep 09, 2013   471 Posts
Dec 05, 2013 at 07:56
ahuruglica posted:
Would someone open a real accound and a demo account at the same time and apply the same EA. Prove once and for all is there a difference between real and demo.

It will be fun to show results here. Anyone?

It must be applied to the same Broker since each broker has different feed. Open a demo and live at the same broker and run the EA side by side. I will do this
RedRhino
forex_trader_149646
Mitglied seit Sep 09, 2013   471 Posts
Dec 05, 2013 at 08:06
ahuruglica posted:
Great observation @forexci


About new traders who martingale and grid strategies sound new to them. It is easy to know if a trader uses martingale or grid, just follow the graph (as below), balance going one way, equity in the other. It is one of them.

This is only true for a Grid type. Using martingale can be applied to anything and it doesn't have to go all the way til your account blows. Traders need to realize that a limit is required regardless of the strategy.
RedRhino
forex_trader_149646
Mitglied seit Sep 09, 2013   471 Posts
Dec 05, 2013 at 08:12
ahuruglica posted:
Thanks @beren

English is not my native language.

By non-random I meant that the process is still random but the distribution of masses is different from a purely random process. For example if you toss a coin there is 50% chance there will be head and 50% chance there will be tail. Lets say we may make an experiment and toss the coin 1,000,000 times (50% of them will be heads and 50% tails, and the difference will be very low because the coin doesn't remember what was the last toss).

Lets treat the same way price tics as random. Most of the days the market will tick 50% up and 50% down (with small difference), but when the markets crash market will tick 90% down and 10% up, which doesn't happen in a purely random process (coin toss). Still the tick will be random because no one can predict what will be the next tick, but the distribution is not the same.

Little math geek here :)

You stated a valid point that a coin toss is random and market events are not. This relationship implies that statistical probability will most likely show the system crashing based on 1 million coin tosses, however basing the system on market events is a strategy
forex_trader_136673
Mitglied seit Jun 28, 2013   852 Posts
Dec 05, 2013 at 10:13
Thanks @RedRhino for the contribution :)
Mitglied seit Mar 19, 2012   7 Posts
Dec 05, 2013 at 11:36
Martingale strategy really works when you know how to use it.
You have to hedging manually when it is the right time.

It is for experienced traders.


Personally i have 90-99% return every year with Martingale strategy.

Mitglied seit Jun 28, 2011   465 Posts
Dec 05, 2013 at 12:12
@Dimitris
You know I tried to use a hedge to put the breaks on a run a way martingale type strategy but I could never figure out when to put it on and what criteria to use to close it down other than a trailing stop. In the end, what I decided to do is to just close the last allowed iteration then start over at the beginning but at twice the lot size. Half goes to recover the losses and the other half is my current profits. After the entire recovery balance has been cleared, the EA shifts back to single size trades. So we use a martingale type recovery for the first 7 or 8 iterations then use the long recovery if it happens to go over the limit.

If you have figured out how to hedge a recovery sequence like that, I duff my hat to you sir, I never could.

Bob
where research touches lives.
Mitglied seit Mar 19, 2012   7 Posts
Dec 05, 2013 at 12:29
@Bob

which ea are you using?


Safe rules for Martingale strategy:

Trade 1 pair with starting lot size 0.01 for every 10.000 USD

Set the max opening positions not to brake below 1000% margin percentage and at the last position, open a hedging position at the half of the total lots opened. Close all positions at the TP of the last position.

forex_trader_136673
Mitglied seit Jun 28, 2013   852 Posts
Dec 05, 2013 at 19:57
bakis posted:
Personally i have 90-99% return every year with Martingale strategy.

I have been looking for someone with martingale strategies that perform consistently. Will you share your account?
Mitglied seit Jun 28, 2011   465 Posts
Dec 05, 2013 at 19:58
Open a hedge half way from the original trade to the maximum iteration? I will need some time to ponder how this would work, I had always tried to hedge toward the max iteration. This is somewhat different, Thanks for the info.

To your question, I use an ea that I created but it is still being beta tested and not available to the public. I try to test for one year before sharing it with anyone else but here is the MyFxBook analysis for this system. You can see that this variation allows for a profit for every trade taken not just a single profit on the wins as a true martingale does. The range size is 25 pips but if you divide the total profit by the total number of trades it will be larger than the total number of trades times the base profit for a 25 pip range because for a while I used a range size of 45 pips looking to optimize the settings.

Phoenix Program Testing Account
https://www.myfxbook.com/members/ForexAssistant/mt4-6040547/570955

You know if you ever want to get together and discuss strategies and compare notes I can find the time. Lets bring Frank Write in on this too, I looked at his trading history, he knows what he's doing. But Frank, the risk level... I like what your doing but not your risk tolerance. I hate ulcers however one can not argue with success. Anyway my e-mail is bob@forex-assistant if you would like to discuss strategies and ideas, drop me a line.

Good trading everyone.

Bob
where research touches lives.
forex_trader_136673
Mitglied seit Jun 28, 2013   852 Posts
Dec 05, 2013 at 19:58
For those who like math, check out this excellent video about fat tails. The true enemy of grid and martingale.

Mitglied seit Dec 10, 2013   20 Posts
Dec 10, 2013 at 21:23
Martingale means = close your eyes and play game = which is impossible.
Technical or Manual = Open your eyes and play game = which is suitable to professionals.😎
Mitglied seit Jul 26, 2012   17 Posts
Dec 11, 2013 at 12:16
il sistema martigale funziona benissimo solo a svuotare il conto
Mitglied seit Mar 01, 2013   70 Posts
Dec 11, 2013 at 18:24
perform consistently...no... but possible...yes. i have doubled an account in a day before using martingale
You win some, you lose some.
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