SCOTT WELSH TRADING BLOG

Is It Risky Or Is It Smart?

Is It Risky Or Is It Smart?

May 29, 2019

It seems like a good idea.

It seems like sound logic

If we have a system that works, why not try to make it better?

Let’s assume our system is profitable, wins 70% of the time, and just produced a losing trade.

What do you think is coming next? Another loser?

We win at least 70% of the time. It seems silly to use the same, boring trade size. Why not increase the trade size and capitalize on the fact that we probably aren’t going to go on a losing streak? That type of strategy should make us a lot more money.

And, of course, this type of trading goes by the name Martingale, and traders tend to freak out when they hear this word.

For many, Martingale equals risky. And scammy. And a guaranteed way to lose everything.

But is it really all those things? Is a Martingale-type system destined for failure or is it a smart move?

Let’s take a look.

For this discussion, we’ll use the Heron system on a Daily chart using the EURUSD. We know that Daily charts are the most stable, and we know that the EURUSD performs well. Plus, we have data on this system, and it appears to be profitable. (I also trade this system live with real money.)

The real problem with Martingale is a losing streak. Everything revolves around the hope that we won’t lose for long or for many trades in a row. If we don’t have losing streaks, increasing our trade size after a loss can pay off for us.

Why wait for our regular trade size to get our money back when we can super-size it and get back to even much faster?

Of course, if we double our trade size and lose, then we’ve lost a lot more than we normally would. And if we double again and lose again, we’re starting to fall down a steep cliff.

And if we double and lose again?

That’s why Martingale has such a bad reputation.

But we can control how much trade size we add. We don’t have to get crazy. What happens then? Let’s take a look.

We’ve already gone over the settings for the EURUSD Daily Heron several times, so we’ll just look at the Report. Here are the numbers if we use 1.4 lots each time from 2003-2019.

Performance Report here.

The win percentage looks good at 72% (remember: it’s the losing streaks that kill us), and the consecutive losing trades looks viable with a worst losing streak of only 1.

It seems like a good candidate for Martingale, right?

So this time, we’ll keep everything the same except now we’ll double our trade size after every loss. For example, our first trade will be 1.4 lots. If we lose, we’ll use 2.8 lots on the next trade. If we lose again, we’ll use 4.2 lots, and so on.

Will it work?

Here’s the Report.

As you can see in the hyperlink, the profit goes way up. But it’s slightly worse overall.

If you look at the profit to drawdown ratio, just using the same trade size every time is superior (506% ROA for regular v. 472% ROA for 2x Martingale).

There’s an important takeaway, though.

Martingale isn’t dangerous or scammy.

Yes, it didn’t do as well overall after we doubled down after losers, but it also didn’t destroy everything. It’s not the account-killer Martingale is reputed to be.

It might even be a smart thing to do.

The question is: are there other ways to use Martingale that might be better?

We’ll find out in our next email.

Talk to you soon.

 

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.