Beating Martingale systems

I think we all agree that all Martingale systems crash sooner or later (unless the trader’s capital is infinite)

Wouldn’t it make more sense, then, to use anti-martingale strategies instead (increase position size with the profits only)?

What do you think guys?

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Actually, a Martingale system works if you have an edge (positive expected return) and unlimited capital. This is how a casino operates. If you don’t have an edge, no betting system will work in the long run.

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Hi GSPTrader,

If you have a mathematical edge, why would you need a Martingale to begin with?

In fact, if your edge is good, your best bet is a reverse-martingale “betting” system, not the opposite.

Even if you are extremely wealthy, you cannot increase the size of your position forever, due to liquidity issues (even with highly liquid financial instruments such as the S&P500 futures or the almighty Forex),

Absolutely.

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Only a casino has the edge, capital, and number of transactions to make Martingale work. Your “reverse Martingale” won’t work either if you do not have an edge and sound money management.

Successful traders start with an edge, and then develop risk controls and money management strategies to maximize long term returns. This is the Kelly Criterion.

That’s precisely what I just said, you need an edge to start a reverse martingale.

Kelly Criterion, while built on sound mathematical principles, is not the only way to optimize your winnings, as your trading capital increases, the fixed ratio money management approach (for instance) is another alternative betting scheme worth considering.

Please note that both systems use a reverse martingale.

By the way, famous gambler Charles Wells was able to ‘break the bank’ twelve times in one day with that type of anti martingale at the roulette in Monte Carlo, in July 1891.

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The point is that if you don’t have an edge with your system, no betting strategy will work in the long run. Because of margin requirements and position limits it is not possible to fully optimize a strategy. Plus, it gets increasingly difficult to make trades as the account size grows.

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Again, yes, I couldn’t agree more.

On the other hand, a bad betting strategy can turn ANY winning system into a losing system, regardless of the mathematical edge.

Yes, at some point in time all good trading systema will reach their maximum potential, and the trader won’t be able to increase his position anymore (not a problem because the trader is now making a fortune…)

Why casinos have table limits :wink:

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Good point.

In fact casinos are perfectly aware that reverse martingales can totally bankrupt them, sooner or later, that’s why they have table limits.

For example, if a lucky gambler bets $100 on number 13 at the roulette and let his winnings ride just 4 times, the casino will have to pay him more than $150 MILLIONS if 13 comes out 4 times in a row (a number that comes out 4 times in a row happens once every 54872 spins at the American roulette, on average).

No casino on earth can take that risk.

Mainly on the martingale side.

If you have billions you can martingale for a long long time. But the casino nips that in the bud pretty quick and nixes the entire strategy with table limits.

Yes, at least in theory, but billionaires rarely go to casinos to play martingales at the roulette tables, they invest in stocks, start or expand their businesses and/or park their money in fixed income financial instruments.

These table limits (stop-loss) protect the casinos from anti-martingales, the only type of betting system that could bankrupt them fast.

I am still not clear on your “anti-Martingale.” Are you referring to reinvesting profits back into the same system? Collective2 does that with their Hypothetical Performance Charts. A $25,000 account that goes to $50,000 shows all trades as a percentage of $50K, not the starting $25K.

As for your hypothetical casino strategy to bet on 13 four times, you have to let all of the profits ride. There are very few 36 baggers in the stock or futures markets. Theoretically, you could do it in the options market. Buy some way out of the money option and get lucky. Then do it again and again and again. Not likely. Again, following the Kelly Criterion, you would only do this if you had 100% certainty of success on each trade.

Hi,

My point is simply this : If ALL martingale trading systems crash and burn sooner or later, why not do the exact opposite and use reverse martingale systems instead (assuming the system already has an edge of course)?

If something always ends up with catastrophic losses, doing the exact opposite should bring fantastic results, no?

And just to clarify, reverse martingale means adding and re-adding to an already profitable position (but ONLY if the total P/L itself is already positive).

Well-known trader Larry Williams used the same principle to turn $10K into $1.1M in a year.

Believe it or not some traders are doing just that.

As soon as the S&P500 drops below its 200, 100 or 50-period moving average they buy the cheapest deepest out-of-the-money put options, hoping to make a killing when the market finally crashes.

What you are calling reverse Martingale is the position taken by the casino, fading the Martingale (with limits on the maximum bet). What you are actually describing is pyramiding. Virtually all pyramid systems also crash and burn. The few who pull it off write books about their brilliance.

Not at all.

Pyramiding, in its strictest sense, means you are adding to your profitable position exponentially (2, 4, 8, 16, 32 and so forth…), regardless of your current trading balance or the heavy losses that the last few losing trades could generate, if the market makes a sudden move against your (heavily invested) position!

But here, as far as trading is concerned, we are increasing the size of our position with our PROFITS only (and trailing the market with a dynamic stop of course)!

In other words, we are not doubling the size of our position simply because we won the last bet (trade).

Big difference.

I’m done. Just start your system and show us all how you do.

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Thanks for your input GSPTrader.
I also see that you left some pertinent comments in a similar thread, this one (now closed):

I am working on it.