All you had to look at the equity curve and the closed sales to see that Enchante would eventually end up in disaster as all the other systems which constantly add too losing positions.
What is astonishing is that on its My Analyst page there were so many people enthusiastically endorsing it, some of those people often critisising systems which actually were quite good.
Will people never learn?
There is nothing more deceptively attractive than a system with an extremely high win rate and extremely small drawdown over a short period of time.
Bound to crash?
Maybe.
I think it depends on how hard the vendor wants to push for the high win rate at the expense of everything else.
No “they” won’t in general. Even if some people do learn a salutary lesson the hard way, there are always many more new people coming along being seduced by the promise of easy riches. Even people who are rational clear thinkers in their everyday lives. It has been so down the ages and will continue to be so.
Riches are not easy. It takes patience and care and perseverance, which sadly are in short supply.
As a vendor who tries to be cautious and realistic (and whose systems have suffered as a result over the past few months) the popularity of these firework systems (and there have been many!) is discouraging. Sadly it seems that - even in these days of information at our fingertips - reckless, or even dishonest, peddling of rubbish pays more.
On the other hand, when all these reckless speculators lose money, they must lose it to someone else… perhaps patience and perseverance do pay in the long run 
"Bound to crash?"
Depends on the size of the vender’s ego.
M.Klein called it "Martingale effect" in the newsletter
so, is there an indicator to measure martingalism of a strategy ?
Should be easy to test
if it looks to good to be true, then it probably is.
best trading quote ever (v.relevant to trading other peoples systems) is jesse livermore " dont be a sucker"
Hi Günter,
the “martingale” principle increases (usually doubles) “bet size” after every loss.
If a trading strategy increases its position sizes (or adds more and more shares to existing “red” positions) I’d call it a martingale scheme.
In Topaz we also add to “red” positions. I always explain it as “opening another independent position in the same symbol”. of course these two “partial” positions are not independent, but all positions have the same size.
This is a subtle but important difference.
Hi Rene,
Could you explain a little more on this topic?
I downloaded your trades and did notice that you open extra positions when the trade is losing (at times). What is the difference with your method and a martingale strategy?
Hi Ceo,
let me try to detail the subtle but important differences once again:
[BAD:] Mr. Martingale says: If I have a 50/50 chance to lose everything or double my investment (you set a chip on roulette black or red): Then this strategy is a sure winner:
If I lose I double my bet.
In trading you have usually a 50/50 Chance that prices go up or down. So you could use Mr. Martingale’s strategy: You double position sizes after every loss.
[BAD:] The problem with martingale strategies: Your bet sizes are quickly much more than all your capital (or allowed bet sizes). You bet 1024 as much as your first bet after 10 games.
====================================================
[GOOD:] Mr. Koch says: There are certain situations with a high probability for a winning trade. We enter a trade with a fixed, known position size in such a situation.
We regognize such a situation without taking existing positions into account. I.e. we enter the favourable trade regardless of any existing position in this very same symbol. We consider the situation as a new, independant chance for a new trade.
[GOOD:] In fact these trades in the same symbol are not (completely) independent. But rather than increasing risk (like in the martingale scenario) our research of historical trades tells us that these second (or third) trades in the same symbol have an even higher probability to win.
Dear all,
(Enchante was a poor system. However, the following comments are made as a general view of martingale strategies)
To me, markets depict chaotic signals. Indeed, there may be times where different signals are cross-correlated, but that mostly depends on time-frame and anyways, 2 (or more) signals may be perfectly decorrelated although each individual signal is autocorrelated. In other words, I believe 2 signals may be trending, but trading these 2 signals may result in a non-trending trade.
That said, and regarding the Martingale comment made by Matthew, I will only comment the following: “It’s even worse in the world of trading, where “bets” aren’t independent of each other, the way coin flips are. There are trends, which means that when something starts moving against you, it is more likely to continue to do so.”.
To me, this is the ever-said typical statement occluding the math behind the fundamental aspect of Martingaling, although of good protective value for clueless investors.
Providing an absurd reasoning, if there are trends and trends are perpetuating motions, then trending in the direction of the stronger trend is a winning strategy better than chance (50%-50% chance, or flip-coin example), considering there is no obvious and systematically working trend-following strategies and that such trend-following strategies do fail miserably and require %risk adjustment such as the turtle one for example, we conclude that trends are not perpetuating motions and trend-strategies are no better than chance.
Although a simple reasoning simply made to trigger the chance of the following discussion, give me enough credits to mention the following: Martingale makes sense if one understand how it should be used. It is not that bets are not independent, it’s that each trade-signal in a martingale system shall be consider a random independent variable, featuring a non-normal non-linear distribution (whereas coin random independent variable are normal). Pushing this further, introducing the trend factor in your non-normal distribution, and the chaotic aspect in the non-linearity (through fractal analysis for example), you end up having a sound martingale strategy … but it is becoming complex enough that one is not calling this martingale anymore. To me, it is.
My point is, Martingale is not the issue, applying it is the problem. Kind of “give a man some food, he will be Ok for today, but teach him how to fish and he’ll be alright for life”. Although Martingale seem simplistic strategies, one can leverage their concept with proper descriptive math to properly use them.
Thanks Rene
Florent,
you wrote:
Although Martingale seem simplistic strategies, one can leverage their concept with proper descriptive math to properly use them.
This is wrong, even if hidden in "interesting sounding jargon".
Simply wrong.
Can anybody tell me what do I have to do in order to receive Matthew’s newsletters?
I have checked the box “receive monthly email newsletters” but I have never received one.
Hi Karl,
FYI, if you have a Facebook profile, you can "like" the Collective2 profile and see them all there too.
Christina
Hi Rene,
To me it seems that Florent is saying something similar to what you are saying, albeit in a more roundabout way. Specifically, you wrote:
…But rather than increasing risk (like in the martingale scenario) our research of historical trades tells us that these second (or third) trades in the same symbol have an even higher probability to win.
To me that sounds like a concrete example of Florent’s general statement:
Although Martingale seem simplistic strategies, one can leverage their concept with proper descriptive math to properly use them.
Now to another point, being that I don’t believe what you wrote is entirely right - the second or third trades may indeed have a higher probability of winning, but the addition of each of these trades still does increase your total risk.
Or have I got the wrong end of the stick, and you are talking of decreasing expected risk (in the statistical sense) instead of maximum possible risk (i.e. worst case) which is what I was thinking of?
This is interesting to me as I occasionally also do something similar to what you are talking about, though in a less obvious way.
Hi Dean,
you wrote:
the second or third trades may indeed have a higher probability of winning, but the addition of each of these trades still does increase your total risk.
Yes, of course you are right.
With every open position (more money in the market) you increase your risk.
The higher these positions are correlated, the higher your risk.
Two (partial) positions in the same symbol, (or if you prefer: more shares of one symbol) means higher risk than the same exposure in several symbols.
On the other hand:
All symbols in the Nasdaq-100 are highly correlated.
If we experience a "black" day the correlation is even higher.
So in a practical sense it does not make a big difference if I open a second position in the same symbol or in another symbol in the same market.
Yes, I agree with you there.
Rene wrote : "This is wrong, even if hidden in "interesting sounding jargon. Simply wrong."
You are absolutely correct Rene, if a trading system has no mathematical edge to begin with (in other words the "system" has a negative mathematical expectation due to the spread and/or commissions), no martingale system can save it from a guaranteed disaster in the long run, because sooner or later the trader (player) will encounter a string of losses that will not only wipe out weeks or months of accumulated small profits, but also his/her starting capital. And we are not even talking about margin calls!
For example if a trader places 3000 forex trades over a certain period of time and his/her system does not have any mathematical edge, he/she will lose $90,000 on average, assuming a 3 pip spread and standard 100K lot trades
Most traders have a hard time understanding this simple fact of trading: Unless you have a trading system that can at least beat the spread (or commissions), failure is certain in the long run.
the newsletter is here :
http://www.collective2.com/newsletters/feb2011.html
the classical such strategy would be to buy lower rated bonds.
For the increased interest you run the risk of credit default.
Most countries are running such a strategy with increasing their debths,
increasing the risk of failure, for the (smaller) benefit of larger
actual budgets.
Or you could sell options out of the money : big chance not to have
to pay something back, but if, then it’s large.
Long ago we were told, that risky strategies have a larger expectation
value because most investors avoid it.
But with computers,funds,futures etc. available we can easily construct
mixing strategies to reduce the risk but keep the expectation value.
So I assume risky investments have no larger expectation value these days.
