How would a martingale strategy be implemented in forex? - page 3

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Dua Yong Rew:
I believe there are people who uses martingale and are successful.

Yes !

 

Mostly peoples thinks only one shape of martingale just increasing lots, but there many ways to optimize it and it can work. The best place for martingale is cross pairs. 

It's true martin can blow account because everybody copying each other and using only 1 formula. 

Let's say with martin only peoples loose but with other strategies how many peoples in profit?

As I experienced there different type of models for martin to reduce risk almost 50%. 

 
Does anybody want to talk about the math ?
 
Marco vd Heijden:
Does anybody want to talk about the math ?
Yes.
Doubling down can work, because it's generally just a strategy for dollar cost averaging. The problem is that doubling down exponentially increases the position leverage, and eventually the law of large numbers plays out to serve up a string of losses that exceeds the quantity that the account balance can withstand.

A common way of dealing with the exponential increase in risk is to also exponentially increase the distance between positions. This solution simply ends up averaging down the benefits of increased risk until at some point of equilibrium the positions are mathematically equivalent to placing a grid of equidistant entries with no increase in size. So basically the martingale gets forced into being a standard averaging down strategy out of a necessity to lower the risk of ruin.

We could play with numbers all day, but a rudimentary estimate from the point of view of some formula of optimal bet sizing shows that the more likely a doubling down strategy is to work with limited capital, the less optimal the bet size is. Basically, the martingale ends up allocating capital at worse and worse returns.

What we could look at instead are simple averaging strategies that don't increase size, and add positions frequently enough to keep the equity curve following a moving average of the asset price. Since fx has a much greater frequency of mean reversion than stocks, the common arguments against averaging down that come from studies on that market aren't really applicable. I mean... Who would average down long term in stocks when the obvious trend over time slopes up and to the right? Fx doesn't do that though, Fx does have trends in it but the only way we will ever just buy and hold a position until it doubles in value is if a nuclear war breaks out.

So yeah, what are the extremes on trends in forex? Given that trading the majors you probably couldn't find a 50% move in a currency pair without price crossing the mean, it should be safe to average in with a plan to withstand up to a 50% move against you. On the same line of thought, if a 50% move against you takes your account down as far as you'd go, a 25 to 50 percent in your favor should double your account... Then figure out how you'd run that strategy in both directions on the same pair through hedging or synthetics and...

Here's a spreadsheet you could copy that can calculate an estimate of how far price moves before you blow up or double your account, using simple dollar cost averaging without the martingale.  https://docs.google.com/spreadsheets/d/1qHSDgAqzcSfN9T0LthScuL3Hzw3bPbUcwwDMONufrGM/edit?usp=drivesdk
 
++++++++++++++ Buy EURUSD 0.1 @ 1.22390 --> Avg price 1.22390 
++++++++++++++ Buy EURUSD 0.3 @ 1.23390 --> Profit before new entry : 82.69€
     --> New avg price : 1.2314 
     --> Actual price : 1.23390 - distance in points with new average price = +/-350 pts (including extra fees)
     --> Profit after entry : 125.18€ (gain of 150%)
>>>>>>>>>>>> Condition for new entry : Profit_after_new_entry > Profit_before_last_entry


So as you can see it's possible to make a lot of money so easily that it finally sounds absurd.

But let me tell you also what is impossible : it's impossible to imagine that someone will do it for you.

 
Matthew Colter:
Yes.
Doubling down can work, because it's generally just a strategy for dollar cost averaging. The problem is that doubling down exponentially increases the position leverage, and eventually the law of large numbers plays out to serve up a string of losses that exceeds the quantity that the account balance can withstand.

A common way of dealing with the exponential increase in risk is to also exponentially increase the distance between positions. This solution simply ends up averaging down the benefits of increased risk until at some point of equilibrium the positions are mathematically equivalent to placing a grid of equidistant entries with no increase in size. So basically the martingale gets forced into being a standard averaging down strategy out of a necessity to lower the risk of ruin.

We could play with numbers all day, but a rudimentary estimate from the point of view of some formula of optimal bet sizing shows that the more likely a doubling down strategy is to work with limited capital, the less optimal the bet size is. Basically, the martingale ends up allocating capital at worse and worse returns.

What we could look at instead are simple averaging strategies that don't increase size, and add positions frequently enough to keep the equity curve following a moving average of the asset price. Since fx has a much greater frequency of mean reversion than stocks, the common arguments against averaging down that come from studies on that market aren't really applicable. I mean... Who would average down long term in stocks when the obvious trend over time slopes up and to the right? Fx doesn't do that though, Fx does have trends in it but the only way we will ever just buy and hold a position until it doubles in value is if a nuclear war breaks out.

So yeah, what are the extremes on trends in forex? Given that trading the majors you probably couldn't find a 50% move in a currency pair without price crossing the mean, it should be safe to average in with a plan to withstand up to a 50% move against you. On the same line of thought, if a 50% move against you takes your account down as far as you'd go, a 25 to 50 percent in your favor should double your account... Then figure out how you'd run that strategy in both directions on the same pair through hedging or synthetics and...

Here's a spreadsheet you could copy that can calculate an estimate of how far price moves before you blow up or double your account, using simple dollar cost averaging without the martingale.  https://docs.google.com/spreadsheets/d/1qHSDgAqzcSfN9T0LthScuL3Hzw3bPbUcwwDMONufrGM/edit?usp=drivesdk

reflects my view too

 
Matthew Colter:
Your maths are wrong. Your "new average" is the break even point for your net position, and if you actually do the calculations you'd see that the net profit of the "old position" is the same as the net profit of your "new" net position. You couldn't just buy 1 euro, wait for it to go up in value by a tenth of a cent, then buy six million euros and put them all in a box to generate more return. . . your average price would be about what you paid for the six million euros, and your profit on net would be the same as if you had bought 6 million 1 euros at your average price.

Your "new average" is the break even point for your net position, and if you actually do the calculations you'd see that the net profit of the "old position" is the same as the net profit of your "new" net position.

No, with the netting mode, it's alright. Position price is directly updated from 1.22390 to 1.2314 which is indeed 350 pts approx below last price 1.23390  with a total of 0.4 lot.

 
Ovidiu Caslariu:

I was interested how there could be implemented a martingale strategy in Forex. Is there any concept of embedding both the martingale, but also follow a trend or analysis with more than 90% success rate?

Use your whatever strategy or system. If market not going your way. That's where you can start introducing martingale


Cheers

Guufuj

 

I discussed above doubling the lot is not a solution , second martin can go more better on cross pairs. 

I attached a statement of real account strategy was typical martin but I didn't applied doubling the lot mostly run on cross pairs.

Wrong Decisions:

Lot was bigger in start and it was wrong decision

Orders Gape was short for major pairs. 

After New optimization 

For martin there several ways to hold equity or reduce DD in real time, this account faced almost 35% DD and wasn't optimized in 2017 Year, but this year after optimization  reduce risk on account almost 40% (not reducing by lot )

After optimization found better way to use Stop Loss for all trades on a specific value if it hit it can reduce account around 15% to 20% in strong trend or flash etc. 

Still working on martin to reduce risk on equity by using Math.  Bets of Luck


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