As you all know, the Martingale system, developed in the 19th century, is a trading system in which a trader will double his stake when he loses a trade resetting the count after he wins a single trade. What is the problem with this ? Well, the first problem with this is the exponential increase in risk which make the system eventually risk very large amounts of money for very small profit amounts. I will now try to argument against each one of the points put forward by people who trade martingales :
- If my account size is big enough it will not be wiped out. This is an awful mistake. Martingale systems will always wipe an account because the increase in risk is exponential while your increase in equity is liner. That is, increasing your capital from 1000 USD to 10,000 USD does not buy you 10 more losing trades, it just means 2 or 3 more losing trades. However, you will not lose 1000 you will lose 10,000 USD.
- But if my system has X maximum consecutive loses then increasing my capital by Y will make the system safe. Wrong again. The fact that your system has X consecutive loses in historical testing or live testing does not mean it cannot have more. All trading systems may face a very large number of consecutive loses. In practice, you will never be able to sustain more than 10 consecutive loses, something which is likely to occur with almost any trading system. You are playing the deepest pocket game. In gambling, when two players are going for martingale strategies the one with the most money wins. Who has the deepest pockets, you or the market ?
- Ok, I accept that my account will eventually be wiped out, however if I withdraw my profits I will still win in the end. This is a very naive argument in favor of Martingales. If wipeouts will always happen, which is the case, the frequency in which these wipeouts happen is unknown, so for example, you may get a wipeout in a month, then one next year then 8 the year after. In the end, a series of wipeouts will remove all profits from the previous runs in which the trader was lucky.
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