Martingale system in Trading

Quote from PocketChange:

We trade ES futures using a 5 step hybrid martigale system hedged with options. In essence its a 54 contract trade that scales in and out averaging down costs to exit either profitably or the entire tradeset hits a safety stop.

Future options hedge the tradesets reducing losses. Trade Long and short tradesets concurrently with a range of 25 points. Profitable exits as long as market checks up 5 points every 25 points. We stop out and take the loss when the market exceeds are programmed trading range. We have blown out many accounts trying to avoid taking the inevitable runaway loss.

Discipline... Set hard and fast session limits. 3 strike outs and close down trading for the session. Lots of $100 - $2500 winners and each stop out is about a $10K loss. (Manageable risk)

Overall returns are decent when ES stays inside of 50 point session swings. Inevitably we are drawn down and forced to stop out. Important: your Risk objective is not to avoid the loss but to mitigate the damages. Using future options to hedge each tradeset you can reduce your loss to 1/3.

ie.

Contract Add increments
1 - Enter Long or Short at market
Add 1 - 5 points
Add 4 - 7.5 points from average cost (Buy options hedge)
Add 12 - 7.5 points from average cost
Add 36 - 7.5 points from average cost

Safety Stop entire tradeset at 25 points from entry.
Exit set at 1.5 points with 1 point trail stop.


This is a very fast game that should be autotraded... Lots of trades, calculations and transactions. Avoid temptation to interfere based on chart indicators.
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This will only stay afloat until such time that volatility overtakes the average volatility.

It will also not work in a "thinner" market and assumes that there is always someone to take th other side of your trade.

Besides the fact this it is not scalable to making the real big money.

Another system dreamt up by some quants types and not in touch in what market reality can, and eventually will, bring.

Look at where the "hedging" of the banks with derivatives brought the economy. Options /derivatives trading only works in a slowly decreasing volatilitiy and once when volatility increases it just blows up. So will the trader who trades this system: one day it collapses.

Maria
 
Quote from bali_survivor:

This will only stay afloat until such time that volatility overtakes the average volatility.

It will also not work in a "thinner" market and assumes that there is always someone to take th other side of your trade.

Besides the fact this it is not scalable to making the real big money.

Another system dreamt up by some quants types and not in touch in what market reality can, and eventually will, bring.

Look at where the "hedging" of the banks with derivatives brought the economy. Options /derivatives trading only works in a slowly decreasing volatilitiy and once when volatility increases it just blows up. So will the trader who trades this system: one day it collapses.

Maria
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Appreciate your feedback. I Agree this method will not make big money in any single trade. Hedging OTM options while trading the underlying simply reduces exposure over 3 -5 strikes of movement. Instead of taking a $10K hit on a single tradeset we take $3K on the chin but the counter tradebot covers the loss and gets us out at break even or with a small profit.

Like I had indicated this is a hybrid martingale - 54 cars algorithmically scaling in and out of trades. Managing exposure and trading risks associated with the max contracts over a 50 point range. 90% of the time our open positions are 6 or less cars.

Our objective was never to pull big money trades but to manage runaway risk and consistently make profits. We take lots of small profits and do what we can to control and minimize losses. Avoid runaways/ blow-ups and Live to trade another day.

ES is liquid and we like volatility... we need price action and swings to trade. We use to trade ER2 with the same system. Use tweaked versions for currency futures. Currency futures have different price action versus indexes futures and their Options spread change the hedge a little.

NQ and YM trade OK but are thin to fill 18 - 54 cars. Our workaround was to pseudo iceberg adds and exits into smaller sets... PITA... Thin markets are tricky as you get partially out and have to reset your position based on what you have left.

Quant Maybe... No doubt theres a lot of math... more along the lines of cruise controlled trade execution.
 
Quote from PocketChange:

Appreciate your feedback. I Agree this method will not make big money in any single trade. Hedging OTM options while trading the underlying simply reduces exposure over 3 -5 strikes of movement. Instead of taking a $10K hit on a single tradeset we take $3K on the chin but the counter tradebot covers the loss and gets us out at break even or with a small profit.

Like I had indicated this is a hybrid martingale - 54 cars algorithmically scaling in and out of trades. Managing exposure and trading risks associated with the max contracts over a 50 point range. 90% of the time our open positions are 6 or less cars.

Our objective was never to pull big money trades but to manage runaway risk and consistently make profits. We take lots of small profits and do what we can to control and minimize losses. Avoid runaways/ blow-ups and Live to trade another day.

ES is liquid and we like volatility... we need price action and swings to trade. We use to trade ER2 with the same system. Use tweaked versions for currency futures. Currency futures have different price action versus indexes futures and their Options spread change the hedge a little.

NQ and YM trade OK but are thin to fill 18 - 54 cars. Our workaround was to pseudo iceberg adds and exits into smaller sets... PITA... Thin markets are tricky as you get partially out and have to reset your position based on what you have left.

Quant Maybe... No doubt theres a lot of math... more along the lines of cruise controlled trade execution.
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your thinking is directly in line with your handle - in contrast we are not interested in pocket change because one day your pocket gets picked and you are left with nothing.

risk is just too high - I see more flaws in your approach and the more I look at your post the more I am convinced I am right.

M
 
Really thanks very very much for all the replies.. much appreciated. I am reading all the replies and as a starter I could not understand few technicalities and I hope this discussion will be helpful to many others as well.

My a/c is small and I was thinking of trading NQ but of course the clear message is NO. I thought for a starter there could be someway to protect and trade. and make some easy money.

Ofcourse in paper trading it is easy as there is a large capital in the account

Thanks again. Please carry on the input and could become a good reference point for others.
 
Quote from asap:

contrary to the above conclusion, an anti-martingale strategy, when properly setup, achieves results that in most cases far outpace other conventional sizing strategies.
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by anti-martingale do you mean doubling the position size as it goes in your favor? ie. 1 contract, + x points, add 2 more, + x points, add 4 more, etc.?

That will wipe out your giant gain with a small move against you.
 
Quote from osho67:
Ofcourse in paper trading it is easy as there is a large capital in the account
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Even with small capital it can be profitable until... you hit that one trade that blows you. You could make money backtesting a couple months and then boom, you hit a further std dev event and your done fast.
 
Quote from IronFist:

by anti-martingale do you mean doubling the position size as it goes in your favor? ie. 1 contract, + x points, add 2 more, + x points, add 4 more, etc.?

That will wipe out your giant gain with a small move against you.
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In short:

1) A martingale money management system is one that advocating
adding to losers.

2) An anti-martingale money system is one that advocates adding to winners.

Hey ya know, Google is a good thing.
 
Quote from nokomisjeff:

The probability of ruin in any Martingale system approaches 100%
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Done correctly an anti-martingale approach to trading can produce substantially good results.
 
Theoretically, if you have a market in which your system randomly generates a positive expectancy, a modified martingale would produce consistent profitabilty.
 
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