Latest Martingale Systems (and other ways to go broke fast)

Trading and Markets
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Latest Martingale Systems (and other ways to go broke fast)

This thread is for posting strategies that use martingale betting and other extreme trading styles to achieve a short term attractive equity curves at the cost of near certain catastrophic loss. Since C2 is littered with these types of systems I am opening this thread as an early warning area for future subs to have a look before committing hard earned money to a potential account vaporizing program.
To quote Wikipedia:

"A martingale is any of a class of betting strategies that originated from and were popular in 18th century France. The simplest of these strategies was designed for a game in which the gambler wins his stake if a coin comes up heads and loses it if the coin comes up tails. The strategy had the gambler double his bet after every loss, so that the first win would recover all previous losses plus win a profit equal to the original stake. The martingale strategy has been applied to roulette as well, as the probability of hitting either red or black is close to 50%. Since a gambler with infinite wealth will, almost surely, eventually flip heads, the martingale betting strategy was seen as a sure thing by those who advocated it. Of course, none of the gamblers in fact possessed infinite wealth, and the exponential growth of the bets would eventually bankrupt “unlucky” gamblers who chose to use the martingale. It is therefore a good example of a Taleb distribution – the gambler usually wins a small net reward, thus appearing to have a sound strategy. However, the gambler’s expected value does indeed remain zero (or less than zero) because the small probability that he will suffer a catastrophic loss exactly balances with his expected gain. (In a casino, the expected value is negative, due to the house’s edge.) The likelihood of catastrophic loss may not even be very small. The bet size rises exponentially. This, combined with the fact that strings of consecutive losses actually occur more often than common intuition suggests, can bankrupt a gambler quickly.” (wiki)

There are many variations of martingale style of position sizing in trading. Trades do not always have to exactly double on every bet, but may just be increased sequentially using leveraged instruments such as forex, futures or borrowed stocks on margin until the margin runs out or the system implodes. Due to the extreme leverage available with these instruments (and margin) the end result is the same: catastrophic loss.

Why are these systems so popular on C2?

Moral Hazard. The incentive to create systems that look good despite the huge risks is due to the fee structure and because managers aren’t risking their own money. This is the same incentive and problem that exists in the hedge fund industry:

"Some critics of the hedge fund industry claim that the compensation structure generates high fees for investment strategies that follow a Taleb distribution, creating moral hazard.[7] In such a scenario, the fund can claim high asset management and performance fees until they suddenly ‘blow up’, losing the investor significant sums of money and wiping out all the gains to the investor generated in previous periods; however, the fund manager keeps all fees earned prior to the losses being incurred – and ends up enriching himself in the long run because he does not pay for his losses.” (wiki)

Here are a few examples of once popular martingale style systems that looked quite promising until they blew up. Many subscribers joined at the peak, seduced by the parabolic equity curve, only to watch their account vanish:

FreedomEURUSD

Texas Double Down

Rising Star

Ascendant VX:

Tell-tale signs of these strategies include: an eye popping smooth short term performance record with a very high win percentage, high quantity of units added per position in relation to the account size (which is often excused as “scaling” by the manager), excessive use of margin and/or margin calls in the trading history, high subscription fees (over $100), paid advertising on C2 featured system area, no verifiable credentials, website or career in trading, and last but not least, NOT trading their own account (no TOS certification badge, and laughable reasons why they “can’t” get TOS certified for some reason or another when asked why they don’t trade the systems themselves.)

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Add my system “Challenge” to the list

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9/8/2015:

Ascendant TY:

Frequently “scales” (in other words Martingale entries) up to 12 contracts just to make $350, holds positions with a single position drawdown of over $11k on a $28k account. High subscription price ($375), all other strategies by manager have blown up using the same technique.

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Should we also include that you called my system a Martingale though as well? And that not everything is black and white.

I think it is doing fairly well since it is not Martingale and anytime you are trading futures you need to have at least one or two times the cash in reserve for contracts traded. Because nobody in this business is right 100% of the time, it is all about cutting losses and letting gains go.

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Not necessarily hence martingale systems can do well for years …

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I think you need to understand more what a Martingale strategy. It is simple adding to a losing position to averaging down. Big difference from scaling into a position to maximum size. Martingale just keeps scaling in with no maximum.

Plenty of systems can go bust from scaling into position to maximum size and position goes south. That is a bust system not necesssarily a Martingale. You can easily see a Martingale system when you see bigger than position size on a position that is losing and it has occured multiple times.

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Good Luck .

Hence martingale is to double your bet after a loss , then technically there’s no martingale system in C2 , maybe semi-martingale .

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I think you’re playing with semantics because even strict martingale betting in gambling cannot “scale with no maximum” because nobody has infinite wealth. That is precisely why martingale betting does not work and eventually leads to account ruin. It also doesn’t have to mean doubling on each bet since adding to a single losing position in trading moves the average cost down so the market only has to return a fraction of the way from the original entry to break even. Still, the eventual result is that you over leverage on a single trade and it only takes a small adverse move to lead to catastrophe as is demonstrated in the systems above. Martingale betting style systems are popular because they can go on for quite a while before the laws of statistic catch up.

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Something is being missed in this discussion of Martingale betting systems as an analogy for trading systems. When each gamble (trade) has an expected statistical loss, no system can make money in the long run. However, a good trader has an expected gain (his edge) and adding to a loss position may be appropriate.

In addition, unless you are a one lot trader, scaling into and out of positions is the professional way to trade.

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If scaling is done within a well defined and reasonable risk level then there is no argument there. But the strategies that we are concerned with here are the ones that may have an edge but rely on continuous adding highly leveraged (or margined) instruments beyond any reasonable risk level and hoping for a rebound, which eventually does not come. This is exactly what a martingale gambler does before eventually going bankrupt.

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The number 2 system currently on C2 is using the same martingale technique as their other systems that have gone bust and were removed from view. I happen to have a screen shot of one of them:

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@ Scaling-in

If you only add to losing positions then that’s not scaling-in thats called averaging down . If a trader is truly looking to scale into his trades then it should be done whether the trade goes against him or in his favor …

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Dear Ash M,

Thank you for your post on Martingale Systems. I got burned by Freedom EURUSD and made a small amount of money on Texas Double Down before pulling the pin. I had dialogue with both system providers and they seemed like good guys who genuinely believed in their strategies (despite such strategies exposing subscribers to substantial risk of loss of capital).

It would be good to have a discussion on this forum on safe profitable C2 systems. For mine, and I am biased here as I gave gotten to know the system provider, The Forex Portal is a really good system that is cheap to subscribe too.

Does Ash M or any other subscribers have recommendations for safe profitable C2 systems?

Regards,
Chris

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Hi Chris,

I welcome you to check out my system, ETF Volatility Timer, and see my interview with Matthew as System Developer of the Month. It is the Case Study under the Information tab.

It is still the only trading system of all the thousands of systems on C2, including stock, futures, forex, and option systems, that satisfies all of the following criteria (you can verify this by using The Grid);

Over 365 days old
Completed over 100 trades
Annual hypothetical return of over 15%
Maximum drawdown of under 10%
Trade “win rate” of over 75%

Feel free to send me a private message with any questions you may have.

Thanks!
Jim

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Hello Chris,

Although trading is never “safe” and you can always lose all your money with any system, there are some precautions you can take against extremely dangerous methodologies. These are only my recommendations but others can feel free to chime in:

— The most obvious precaution is to check whether the developer is trading their own account with the strategy they are offering. And by that I don’t mean them merely telling you they are trading it, but actually proving this by becoming "TOS certified” with a badge showing the leverage they are trading with. If they’re eating their own cooking then, unless the manager is suicidal, they should behave more responsibly than if they are just playing around with sim money while risking other people’s money. C2 makes it very easy and inexpensive to do this (e.g. the Trade Leader system will read in the trades from their brokerage account even if they’re entering trades on another platform), so there is really no excuse for not having this badge of authenticity. Unfortunately, TOS certified strategies are few and far between on C2. If the manager has a verifiable career or certification with the NFA or SEC that might be another way to gain some confidence in their knowledge and experience with trading…

— Length of time and the quantity of trades—the more the better. Anything less than a year old or less than 50 trades is not statistically significant and their track record could be just blind luck. If they are TOS certified then perhaps you can take in to consideration previous performance history they provide.

— Don’t trust a pretty chart. Anything going straight up with hardly any volatility is not realistic and most likely has been over optimized for recent conditions. When the market changes the strategy and equity curve will most likely collapse. There are no holy grails or magic algorithms and nobody can see the future. Therefore anything that looks too good to be true IS too good to be true. Expect some volatility in a good strategy that has been through a variety of market conditions since that means it’s flexible enough to adapt to unseen market data.

— Red flags include martingale entries (“averaging down” more than 2 times), margin calls, selling options on high value volatile underlying contracts such as the VIX or high priced stocks combined with a high win percentage. This can mean that large losses are hiding temporarily and pushed off in to the future.

— High subscription fees (over $100). This indicates their primary business plan is to make as much money off subscribers in the short term as possible rather than relying on their own trading. A good trader will make far more money off their own trading than sub fees ever could and so has no need to gouge subscribers to make a living.

That’s my 2 cents. I’m sure others have their own opinions, recommendations. If there are specific strategies you’re concerned with please post them here.

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I agree with everything that you say, except for the part about fees. You get what you pay for. I do make far more from my trading (TOS) than I do from fees. But, this is not a charity. CTAs (I am registered) charge 2% management fees plus 20% of the profits. For my programs AT Pro and ST Pro I charge less than 2% of the nominal size of the leveraged accounts and no performance fee. Long term subscribers have made over 10X their total fees.

If a subscriber is worried about a subscription fee or $250 or more, they shouldn’t be trading futures. Daily volatility can be ten times that or more, depending on the program. The under-capitalized or cautious investor will panic and drop out on the first down day. I have had over 100 cancellations, even though my programs are at new highs.

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Hi GSPTrader,

I hear what you’re saying. I think in your case since you are TOS certified and NFA registered and have a multi-year track record, that you may be in a different category from what I’d be worried about. However, there are many short track records, non-TOS, non-pros who try to make money by using an over optimized or martingale strategy to solicit high fees until they blow up.

That said, I still don’t think you can fairly compare a 2/20 CTA managed account to a C2 subscription fee since “publishing” entails far less risk, no disclosures, low overhead, a much wider market since you don’t have to worry about “suitability” of the investors, etc. And the C2 investor really has no idea who you really are, has no signed agreement with you, no verified background information or approved disclosure document, no recourse if you don’t trade responsibly, and should therefore be compensated for this much higher risk level. Most likely they’d have to diversify between more than one trader to hedge for this type of risk so a low sub fee is the only way to really compensate for that in my opinion.

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Your points are well taken. However, if I had 100 subscribers at $100, it still wouldn’t be overly profitable after 30% to C2 and expenses. Also, with that many followers, the slippage on my own account would offset the subscription fees. I think that I offer a very good value for the price. If a subscriber wants to take a flyer on a low cost provider, then they are welcome to pass.

Incidentally, how many systems meet your criteria?

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I checked the Grid to answer my own question. Adding the qualifier of a Sharpe Ratio > 1.00, only one system of the 54,000 (?) on Collective2 meets your goals - Carma Stocks. If you remove the fee requirement, my AT Pro system is the only other system that qualifies at $250 per month.

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Hi AshM,
This was a very informative discussion between you and GSPTrader. I wonder if you and GSPTrader could give me your opinion about the following (which is only indirectly related to the subject matter): I am biased to systems which have a low win ratio but high average win to average loss ratio. Last time I checked the grid most of the long term profitable systems with less than 20% drawdown meet these criteria. Many people just look at the win ratio, unfortunately C2 also seems to emphasis the win ratio by stating it in the first line of the statistics overview - in my opinion stating the win ratio without the average win to average loss ratio is absolutely meaningless (Matthew, your comments would be appreciated). BTW, ST Pro meets my above criteria but it is a very young system while AT Pro does not, in addition AT Pro has such a long recovery period, it is the length of the recovery period not the absolute drawdown which bothers me, I mean how many people are willing to wait a year or longer for recovery. Any comments would be appreciated. BTW, I also like Carma stocks, even though it has a relatively high win ratio it still manages to have a slightly higher average profit to average loss ratio but where it really shines is the low drawdown. For a conservative investor I think there is no better system on C2.