Dangerous strategy with a Martingale example

Trading and Markets
1

Hello all: @MatthewKlein, @FranciscoJimenez

As a potential investor who has been reviewing some of the strategies here, I am extremely concerned with the following example.

Even though Martingale is a very popular word on these forums, I have never seen anyone provide a concrete example. I myself have not thought something like that would really happen in real life. But it does. So, here I offer an example obtained from the trade logs. If you are also an investor or about to be one, please consider this as a sober warning to do your due diligence.

This particular strategy is prominently promoted by C2 at least as long as I have been watching.

A quick glance of the trade record gives the false impression that this is a strategy that primarily trades a single lot with an occasional exception. Such an exception does not mean that this strategy scales only up to two or three lots. In the screen shot I provide, he started with shorting a single contract After 5 shorts of single lots at successively lower prices and accumulating enough loss, he moved on to shorting two lots at a time. He went on to adding 12 more contracts to the initial 5 shorts. Finally he closed out with a 17 lot buy order.

This is not easy to do when you are trading with your own money. (Of course. it is always possible with other people’s money).

I now have a couple of follow on questions.

  1. What is C2 doing to monitor this type of abuse?
  2. What steps should the investor take to protect himself from margin call arising from this type of trading? If anyone starts out with a $30,000 or $50,000, he will get burned badly with a margin call / liquidation.

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What is the strategy name?

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Hi Andrey:

I have reached out to the strategy vendor as a courtesy before making it public. It appears he is either unaware of my question or he is deliberately avoiding me. I will give him another 10 minutes before I send an email to the customer support.

I hope at least C2 will respond to this thread. It is important to protect both the investors and also the vendors who are serious about their offering.

Regards
Francisco

4

There are no limitations on what and how you trade / provide signals on C2, so this can’t be considered as an “abuse”. I don’t think that customer support can help you with it.

Answering on your second question - set max number of contracts in the auto-trade control panel and you’ll be as safe as you could be trading demo signals from unknown providers.

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5

While I don’t personally think this is a good trading strategy, there is nothing mathematically impossible about the trade sequence from a margin-use perspective.

Remember that C2 always checks that trades are allowed given the C2 Model Account size.

Thus, a strategy developer is generally prevented* from trading at larger quantities in his C2 Model Account than a real-life account could trade (assuming the real-life account has the same cash value as the C2 Model Account.)

For this reason, when setting up AutoTrading, you will want to choose a “Scaling %” which reflects how much smaller your broker account is than the C2 Model Account.

Also, you should set a Maximum Unit Size to insure that positions are not ever entered that are larger than you can handle.

–
Footnote

  • Why do I say “generally prevented” and not “utterly, absolutely, and entirely prevented”? - for a few reasons.

First:

  • Because it is possible for a strategy to open a position in the Model Account which ultimately results in a C2 margin call, but that C2 margin call might not be processed immediately at C2, whereas it might be processed immediately in a real-life broker account.

Also:

  • it is possible that a large and sudden “intraday drawdown” on an already-open position might occur, which in real-life would trigger an immediate margin call, but which is not “caught” immediately (or ever) in C2’s margin call simulations.
6

Welcome to Collective2. There are a number of these sorts of strategies running at any time, some highly rated. They can look great until they one day blow up. I’m quite sure most the system creators are well aware of the hidden risks of what they are doing and won’t warn subscribers. Here is what you look for:

  • % Winning Trades very high (90% or greater)
  • High fees
  • unusually smooth and pretty equity curve often with occasional sharp drops that rapidly recover

To be sure go through every trade in the trade list and look down the “DD” column for large trade drawdowns. Watch for typically low DD values with occasional larger values. Look across on the larger values at the “#” column and see if the larger drawdown trades have a significantly increased number of lots traded. That is sign of increasing risk on losing trades which is the halmark of these systems. Hit the “>>” icon and page through all trades. Sometimes just the DD value alone is enough to reveal the system is bogus. One currently top rated system has several intraday DD vales over 100% (that’s a complete blowout). Yet the system still runs and has a high rating and subscribers who are in for a surprise one day.

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7

He is referring to ZeroT.

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8

Hi Francisco,

Much of the info below was gathered from a similar situation elsewhere a few years ago.

Please do not confuse between SIGNAL ALERTS and INVESTMENT ADVISORY. Have you ever seen the word “invest” or “investment” mentioned anywhere on this website, other than in the forum by us by mistake - while we may see the word “trade”? And the words “FOLLOW THE STRATEGY” is stressed as the whole set up is based on that term.

Signal providers like C2 are not in the business of hosting or providing investment advisories. Otherwise, all those developers who provide signals here on C2 will need to pass the various licensing examinations and be registered with the relevant regulatory authorities. Sometimes even with non-US regulators!

C2 is providing a platform for strategy developers to test their strategies and provide analytics for that. (From personal experience, C2 analytics are far better than the many paid analytics out there.) Subscribers are paying for watching the system development as well as receiving the signals generated. Those signals are not investment advisories.

That means you may see the whole gamut from the best to the worst and everything in between including Martingale. It is the duty of the potential SIGNAL ALERT subscribers to go through the Grid and filter out the bad ones after going though the analytic report part of each system. Of course, we can bring the issue before the forum without personal vilification and acrimony.

If anybody is using C2 signals for investment purposes, nobody is going to stop them, but then he or she alone is responsible for that. You are paying to “FOLLOW THE STRATEGY” at your own will!

What protects SIGNAL PROVIDERS like C2 and their participants from legal actions and regulatory requirements is the focus on strategy development and analytics. Subscribers should be fully aware that they are paying to receive signal alerts, NOT INVESTMENT ADVICE. The analytical part gives the added protection to C2 and differentiate it further from other SIGNAL ALERT providers.

SIGNAL ALERT subscribers need to do more homework than the regular subscribers of a registered investment advisory BECAUSE WHAT YOU RECEIVE ARE JUST SIGNAL ALERTS NOT REGULATED INVESTMENT-GRADE ADVISORIES, which are a class of their own.

And C2 strategy developers who provide and receive subscriptions should be doubly careful about the words they use in advertising their systems as if they are investment advisories, UNLESS YOU ARE REGISTERED AND LICENSED. Remember you are just signal providers, not investment advisors. Use only “analytical” terms like ratios and measures, which any way are graciously provided by C2, to highlight your systems. Just like C2 has a contractual obligation to you, you also have a reciprocal obligation to C2.

Let us not forget that C2 is a test bed for “trading system developers” and that provision of signal alerts (AGAIN, NOT INVESTMENT ADVICE) is only a by-product of that service.

Regards.

9

This was a very good post for using the C2 Explorer to graphically show how much leverage is being used by a system. You have to copy and past the code into the C2 Explorer and change the list of systems at the top to the systems you are interested in, but this takes just a minute.

The risky martingale systems show up very large multiples on these charts.

If you are unaware the C2 Explorer is here:

Click on the “My Queries” tab, paste the code from the above post into the box (change the systems to what you care about), then click the “Run” button and scroll down for the results. Go through the top systems putting them in that code and see their leverage multiples… you might be surprised at how many systems get pretty crazy.

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In the name of Wugot strategy, me as the trader behind it I present my deeply feel of pain for a suh trading style. This will never happen at wugot. Period. WE trade 2 contracts and it can only go up to 5. However, we will do our best not to reach 5 contracts.
I am very disappointed by some of the so called strategy.We care for your money much more than you could ever imagine. We hate to see you loosing. We trade like your money was our money.

www.copybauviltrades.com

Lejeune for wugot.

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When he took the 17 sell, the contracts were not at lost on the buy side. In that case, it seems that has not created any loss into traders account. Am I wrong?
You are mad because the trader keeps adding on the trades?

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It’s not about the trade being a loss or not, it’s about the risk taken on the trade. If you crank up the leverage in your account 10x or 20x or even more, risking hundreds of thousands of dollars in order to turn a trade profitable you are risking the entire account for a pittance. You might not understand this (yet), but that is extremely bad trading and traders that do that eventually go bust. All you have to do is ask yourself… what if that trade DIDN’T turn around? The only person that would do such a thing is either clueless or isn’t actually trading their own money.

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bauvil, I can only pray that this MARTINGALE ACTIVISM will not kill C2 or drag C2 into legal complications. I am saying this because two things don’t add up here:

  1. These positions were added over a 7 day period, and held overnight and so day trading rules don’t apply 2. The DD risk was only 0.04 even after all these additions as per ? the insufficient data provided! Agreed, we don’t know about the capital available at that time as the webpage is inaccessible now.

Hope C2 won’t close system pages UNLESS the complaint is by a current subscriber whose money is at actual risk. Complaints by non-subscribers should be thrown open to further discussion.

The data provided here does not implicate the system provider in any way, unless there are more incriminating evidence. There are oscillator and mean reversion systems out there that allow adding positions once a predetermined price is hit. Regards.

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14

It doesn’t take being a subscriber to see martingale systems blowing out on here. There is plenty of evidence that is public to all if you know where to look. I doubt there is liability for C2 but that’s not the point. The point is there are extremely risky systems on C2, some highly rated, that will blow your account out eventually. You should know how to detect and avoid those systems if you want to avoid being blown out. My first post on this thread above describes how to avoid most of these problem systems.

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15

After my above post, I was able to access the system page through another link. He was adequately capitalized at that time.

This blackmail of system developers should end once for all. The modus operandi is this: send a communication to a developer expecting a favorable answer. If the answer is not favorable, immediately jump into the forum and start a propaganda against the system developer. ONCE A SYSTEM WAS CRITICIZED BECAUSE HE SAID HE HAS NO ANSWER AGAINST BLACK SWAN. Who has it? If anybody has it they should be definitely be in Wall Street, not here in humble C2.

If you are not adequately capitalized even to have a 0.04 DD, why at all bother to trade? Also, let C2 statistics tell about the system, not ad hoc analytics as if C2 analytics are fake.

Forum should not be the place to kill systems just because a developer didn’t give the answer which pleases you. When C2 analytics says the capital requirement is 100,000 no question of doing it with less. If that is not suitable for anybody, just keep away instead of criminalizing the developer.

C2 needs developers as well as subscribers, not subscribers alone!

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16

That would be a great idea, but for the specific system mentioned in this thread the calculations in the per trade risk column are incorrect (and would consequently be of no use in determining that this system can have large per trade drawdowns which would shut down an undercapitalized trader). At least 15 contracts were short at the worst price of 42.22–based on that information the system’s worst drawdown for this trade was at least $19,830 which is approximately 13% of equity, not the 0.04% shown in the “Risk” column in the system’s closed trades log.

(and since it was the only trade open at that time, the max drawdown for this system as a whole [shown in big red numbers at the top of the page] should be at least equal to 13% as well [instead of the 9% that is currently showing])

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This appears to be a genuine bug, and something must have gone wrong when C2 was calculating the Max DD! The Max DD value is usually negative, but in this specific case it was positive.

Just a guess, that this might have something to do with Contract expiry.

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Hi, guys -

I’m looking into the trade drawdown calculation to see what happened here.

I’ll post more info shortly.

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The max drawdown shown at the top of a system page is based on end of day values, not intraday values. Pretty much all C2 systems have a larger drawdown intraday than the max DD shown by C2 because of that. In some cases (particularly with martingale systems) the big max DD shown at the top of the page is VERY far off the real max DD the account suffered. That’s why I said in my first post above in this thread that you must go through the entire trade list and look at all per trade DD.

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C2 measures equity several times during the day. So the DD values are not end-of-day exactly, but still can miss max intra-trade dd.