Reverse Martingale - two winners in a row

[PBS]

I am considering a trading system in which you play to get two winners in a row, where the second winner is risking the profits of the first one. After that, or after a loss, the risk reverts to the standard risk. It is modified reverse Martingale position sizing.

For example - standard risk is $100 and the sequence follows:
- trade 1: risk $100, profit: $300
- trade 2: risk $300, win: $600

- trade 3: risk $100, profit: $200
- trade 4: risk $200, loss: -$200
- trade 5: risk $100: profit: $250, etc.


Will that work in the long term?

 

[FreeGoldRush]

Why would you do this?? You should have only two goals: 1) Optimize average return per trade as high as possible, 2) Optimize standard deviation of returns as low as possible. Your strategy does nothing for goal #1 but will work against you with goal #2.

 

[SoyUnGanador]

Since it gives you no edge in picking the underlying as winners or losers in the very long run, if you don't go bust, it should do about equally as well as not using the system.

 

[KCalhoun]

It's brilliant and exactly how I daytrade, I was doing that with live uvxy premkt trades in my chatroom today

 

[murray t turtle]

I am considering a trading system in which you play to get two winners in a row, where the second winner is risking the profits of the first one. After that, or after a loss, the risk reverts to the standard risk. It is modified reverse Martingale position sizing.

For example - standard risk is $100 and the sequence follows:
- trade 1: risk $100, profit: $300
- trade 2: risk $300, win: $600

- trade 3: risk $100, profit: $200
- trade 4: risk $200, loss: -$200
- trade 5: risk $100: profit: $250, etc.


Will that work in the long term?

%%
YES, your exact example most likely would work in the long run. But the most likely problems are the market is not a casino [or coin flip]+ even more\ the real time pattern is not likely to repeat like that. It doesen't look anyone modified that martingale much, except to sell a system.[ Edit;IF you did not pay for that, so much the better LOL]
But good thing for you, the market is not a coin flip or casino;
+ since there can be winning streaks,[+ losing streaks] a grain of truth can be found most anywhere.

 

[Zwaen]

Normally P(trade 1)=win is independent of P(trade 2)= win. { or EV(1) = EV(2)}.
Or is this not the case?

 

[FreeGoldRush]

Normally P(trade 1)=win is independent of P(trade 2). Or is this not the case?

Careful. You are using reason and logic. And what you calculate from what you just said is that the stated strategy will increase volatility without increasing return. Ouch.

 

[PBS]

I do not know what to think myself of this idea.
It is just as rational as some daytraders' idea of "A setups" where they risk 2 or 3 "units"/"clips" or 50% of their daily loss limit and "B setups" where they risk only 1 unit or 10% of the daily loss limit.
Personally, I have no idea what will be the end result of the trade I take. I also do not mind giving away the profit from the last trade which may have lasted, for instance, 1-4 hours. If the next trade is a loss then I will be in almost the same position (maybe slightly worse due to commission and slippage in trade 2) in terms of account equity as 4 hours ago. My mental capital will not be affected too much.
I would not like to risk the profits of the entire month on one trade but risking just last trade's profit on the next one is not so bad.
I know mathematically it cannot be justified but from a psychological point of view it makes sense.

This implies that equity will move very sharply up and sharply down but the drawdown below the starting line (or the principal capital) should be rather low. And recovering from a drawdown much quicker. In two trades you could move up even 10 x standard R, for instance, although the trades themselves may represent only 2-3 R in terms of points.

 

[deaddog]

What do you do if you lose several trades in a row?

 

[FreeGoldRush]

I know mathematically it cannot be justified but from a psychological point of view it makes sense.

If your goal is to make money then pay attention to the math. If your goal is to have fun and feel good then do whatever feels good. Trading takes work just like anything else. A first semester math course on statistics and probability covers most of what you need to know when it comes to measuring your progress, taking position sizes, protecting your account, etc. No amount of psychology will twist the math to work in some other way than how it actually works.