How much money would you need to Martingale your way to profits?

[murray t turtle]

Quote from Maverick74:

Listen to me. It won't work. Because in order to "truly"' leave enough capital in reserves to keep buying, you will need to trade super super small on a very large account.

See the problem lies in the fact that you will not know ahead of time how many purchases you need to make. So to make sure you can buy "all the way down" you need to trade very very small. This means that technically, the only way to do really well is during an actual crash like in 2008 where hypothetically you will be able to deploy all or most of your capital. In a normal market you will be invested with such little size that the % return will be minuscule.

Let me give an extreme example. Say you have a million dollars and you decide you will buy one e-mini every 25 handles down all the way to zero. What happens if you are only long one e-mini for let's say a 6 month stretch where the market really goes no where or even rallies. Say the spoos go up 50 handles over that period. So you made 2500 in profit on that one lot on a million dollar account. Annualized that comes out to .5% a year or about 1/4th of what a CD is paying right now.

So the irony is, in order to do really really well, you want the market to go against you as much as possible all the way down to your last available purchase. That's one tall order. Sure, every 25 years when we get a 2008 type selloff you will perform very well. But the other 24 years you will earn less then cash. I don't see any edge here.

Run the numbers. You'll see what I mean.

Now of course you could say that you will buy a one lot every 5 handles down, but again, you need to do the math so that you are 100% sure you won't run out of capital at the bottom. My guess is you would want to err on the conservative side. The math just doesn't work.

==============
Good points, good example.
Some did run out of capital near you time frame example;
GM......Somesmall & large banks even misfigured;
LEH,BSO........

 

[Cache Landing]

It seems that some are a bit confused as to the ideal conditions for a marti strat. In the martingale, the ideal is for a sideways choppy market.

For some reason people seem to keep going back to this idea that the highest profit is obtained when the market runs against you big and then reverses completely. That is best for a dollar cost averaging strat, not a martingale strat.

 

[1a2b3cppp]

Quote from Cache Landing:

It seems that some are a bit confused as to the ideal conditions for a marti strat. In the martingale, the ideal is for a sideways choppy market.

True, but if you're martingaling efficiently in a choppy market and then it significantly moves against you, you run the risk of blowing your account or catastrophic losses.

For some reason people seem to keep going back to this idea that the highest profit is obtained when the market runs against you big and then reverses completely. That is best for a dollar cost averaging strat, not a martingale strat.

How is dollar cost averaging different from martingale?

 

[Soon2Bgreat]

Quote from 1a2b3cppp:

How is dollar cost averaging different from martingale?

Martingale implies a strict formulation for doubling your bet on each new bet after a loss - averaging down is arbitrarily purchasing more units after a loss, it can be done in any ratio.

...as has been said, many times, this is a losing proposition unless you have positive expectation. If you have that, there's probably better ways to play it.

 

[1a2b3cppp]

Quote from Soon2Bgreat:

Martingale implies a strict formulation for doubling your bet on each new bet after a loss - averaging down is arbitrarily purchasing more units after a loss, it can be done in any ratio.

Ok that's kinda what i was thinking. I just call it martingaling but I think what I mean to say is "averaging down."

...as has been said, many times, this is a losing proposition unless you have positive expectation. If you have that, there's probably better ways to play it.

I would argue that it's not a losing expectation if your range is big enough and the instrument doesn't go to zero, but I've been doing that throughout this entire thread and I'm not convincing anyone.

 

[Soon2Bgreat]

Quote from 1a2b3cppp:

I would argue that it's not a losing expectation if your range is big enough and the instrument doesn't go to zero, but I've been doing that throughout this entire thread and I'm not convincing anyone.

It has nothing to do with the size of the range it has to do with the returns distribution - it's probability theory. "sjfan" tried to explain this to you at the beginning of the thread and if you had even googled martingale or probability theory at that point, you would've realized how it differed from averaging down and that it is a losing proposition.

If you have a bet that pays out 60/40 with a 50/50 chance of winning, that's positive expectation.

You can play with the payouts and skew the distributions all you want, the bottom line is most instruments are 'fairly' priced so that you'll not likely be able to achieve this consistently. Who knows though - maybe your method has a way of changing these in your favor, you could be right.

I think the general consensus is there are less risky and more capital efficient ways of trying to go about creating positive expectation (if you believe it can be done).

 

[AlexLutiera]

Quote from PocketChange:

Hookers and cocaine

oh my? well that would be a great answer. so you really thinks that it is the real reason for it?

 

[Cache Landing]

Quote from 1a2b3cppp:

Ok that's kinda what i was thinking. I just call it martingaling but I think what I mean to say is "averaging down."



I would argue that it's not a losing expectation if your range is big enough and the instrument doesn't go to zero, but I've been doing that throughout this entire thread and I'm not convincing anyone.

Whoah!. You need to realize that there is a huge difference between dollar cost averaging and martingale. Don't ever confuse the two. Dollar cost averaging has been shown to increase returns time and again for the average ignorant investor.

Dollar cost averaging will almost always generate higher than market returns, but is a long term strategy, and should be tightly controlled in terms of money management. This is not an inherently losing strategy, but should really be limited to indexes like SPX where a drop to zero is so unlikely as to make it nearly impossible.

Martingale OTOH, is a mathematically losing strategy on any time frame. The two are very distinctly different.

 

[AlexLutiera]

Oh, haha. All of us have many reasons why we need to invest. But, it doesn't matter how much you earn, as long as you were able to achieve profits, right?

For the previous posts, those information and answers you have given could be of help. But, as a trader, being profitable is the key.