Martingale system.

Martingale system

This system is based on the another gamblers fallacy.
During times of losses it increases the position size, doubling the size of the trade after each successive loss.
This system convinces the traders/investors that they have a chance of making money through money management.
Based on the assumption that after a string of losses you will eventually have a win and when you do win you will recover your losses and make a profit equal to the size of the original trade.
Unfortunately two points are against this system:
- Statistically long string of losses is possible.
- If you start with a trade of $1 and double it at each loss by the time you get to the 10-th trade, you are risking $1,024 to make $1.
If you lose again you need to risk $2,048 to make $1.
In this case risk/reward ratio is 2048 :1.
Martingale system do not work - so never add to a losing position.

 

I have a mate who tried this at Burswood Casino about 20 years ago. He thought he had an unbeatable strategy, on the Roulette wheel.
He loved to bet on black, so he put $2 on black. If he lost, he put $4 on black, then $8, ...
All of you with an IT or maths backgound would know that very quickly, you'd get to serious sums of money. Eight goes and you're at $512.

Well my mate never expected to see eight reds in a row, but it happened to him, and he quickly hit the $500 table limit.

What he didn't realise was that if he had eight blacks in a row, he would win $16. With eight reds in a row, he lost about $1000.

(The irony here is that he went on to make millions in the stockmarket... he is the richest person I know!)

Seriously Tropo, does anyone think this would work? I guess Nick Leeson is a case in point.

 

You have got no idea how many people follow this 'system'
Yes Nick Leeson thought he could average a loss and we know the rest of the story hahahaha...

 

"Martingale system do not work - so never add to a losing position"

So what is different between Martingale system and dollar cost trading, the assumption is that at some point there is going to be a turn around in fortunes and you make a gain!! Take a trade in Mac. Bank down from $100, buy at $90 on the way down, add to the "losing" position at $85, again add another (better value now!) at $80, again at $75. Now hoping that the stock will return to $100 and you make up the losses gained on the way down and then some on the way up!! Of course if the market tanks you have compounded your losses from the original buy.

To quote a certain politician "PLEASE EXPLAIN" - why is Martingale dangerous and not DCT.

 

"To quote a certain politician "PLEASE EXPLAIN" - why is Martingale dangerous and not DCT."


DCT is purely mechanical system. You are buying when shares are oversold and selling if shares are overbought. There is a lot of overbought/oversold indicators you can follow if you want trade that way.

 

As a share drops in price you may assume that there is more than a 50/50 bet that it will return to former glory. Not he case with blacks and reds.

It may be a good idea to understand why the share has dropped. Often it is purely a reflection of the whole market fluctuation. Hopefully not a crash!

MJK

 

As a share drops in price you may assume that there is more than a 50/50 bet that it will return to former glory. Not he case with blacks and reds.

What about Bond Corp. Quintex, HIH, Enron etc....Never assume. React and go with a flow.


It may be a good idea to understand why the share has dropped. Often it is purely a reflection of the whole market fluctuation. Hopefully not a crash!


Market go up and down. What happens is a reflection of the psychology market players/participants NOT information.

 

Yes, and not chance either as with roulette.

MJK

 

Guess what...Once my wife played roulette. She lost
But she had stop loss in place, lucky me...

 

People that have been to the Navra seminar and Steve's presentations know the criteria and rigorous research that goes into selecting shares that are bought and sold. The shares certainly aren't picked out of a hat randomly. Of course, there are always going to be duds in the picks (not saying that Macq Bank is a dud) - even the best of the best lose sometimes - just ask Tropo.

Mark

 

"Of course, there are always going to be duds in the picks (not saying that Macq Bank is a dud) - even the best of the best lose sometimes - just ask Tropo."

Yep...You are correct.
The best traders experience sometimes embarrassing losses because they are humans after all.
All traders lose ! Difference between outstanding traders and other traders is the way they handle their loss.

PS - Nobody is perfect except me = hahahaaaaa....

 

It sounds to me that what you are describing is a system based on a probability view of trading. There is a pretty respectable literature on this. Try the books by Ralph Vince on the 'kelly Criterion'. If you want a really heavy mathematical lunch Google 'Universal Portfolio'.

 

Not quite.
You can compare Kelly system with Martingale system here:

THE KELLY CRITERION IN BLACKJACK, SPORTS BETTING, AND THE STOCK MARKET = Kelly
Why The Martingale System Sucks = Martingale

Have fun

 

As long as you have deep enough pockets and arnt afraid of the risk then this stratagy can be very useful, if you keep doubling you will never loss, yes 8 blacks in a row is rare, but have you ever seen a single colour go for 20 or 30 spins? Maybe something to look up in the guiness world records...

For one colour to come up 8 times in a row there is a % of 0.39% chance fairly low odds

The % of the same colour 20 times in a row is 0.000095% however at the same time you would be betting $1,048,576 to just get even. But if you have a strategy and stick to it, very similar to trading i guess...

 

That's why it doesn't work - you can't bet in perpetuity. Most tables have limits for a reason. I was discussing this with a guy on another forum once who was convinced he had the 'secret' to winning at roulette. No matter how much I explained it to him, he wouldn't believe me, even after I told him that the house hires experts to work out systems and how to beat them.

Finally I just ended up asking him why he was sitting in front of a computer talking about his guaranteed system when he should have been at the casino getting rich.

Mark

 

Its a good thing the Navra system touts itself as a blue ship share fund then. The assumption is that overtime the shares will trend upwards.

 

"The assumption is that overtime the shares will trend upwards."

Very risky assumption IMHO!

 

Maybe. But if people assumed the market tracked flat, or trended down, they wouldnt bother investing in it.

 

A lot of people are in share games not long enough to understand what flat or trending down market really means.
You see, even during doom/gloom times some shares are trending up, so right selection is critical and increases probability of success.
The only 'trick' is to find the right stock/s.

Statistically stock market is trending sideways most of the time, so if you get it wrong you may wait a long time to get your money back (eg.Telstra etc).
But if you think that now is the time to engage the market, that is fine - but make sure that you do have basic strategy in place just in case if something goes wrong.

 

The Risks of Doubling Down on Falling Stocks

I thought this article presented a pretty useful introduction to the problems associated with this strategy.

The Risks of Doubling Down on Falling Stocks :: The Market Oracle :: Financial Markets Forecasting & Analysis Free Website