Money management & Martingale

[Dogpile]

<<So risk 16% each time ... How many ES contracts should I trade if I use a 100K account?>>

if this is a serious question --- dude, 16% per trade?

60% and 1.25 ratio is fine if you do lots of trades. that isn't my style but I know some traders with numbers like that and they do great.

Personally, I would err on the side of being very conservative with contract size if you are getting 40% losers.

If your style is to do lots of trades per day, smaller size trades can add up and you will not get the big dollar drawdowns associated with trading bigger size after having a bad run. a 'bad run' is never that far away if you are getting 40% losers. moreover, many 5-lot ES trades in a day adds up quickly if you trade a lot and can really get that 60%/1.25 target consistently.

[maildigger]

I used the Kelly formula and this is my outcome. I would be very hesitating to risk 16% of my account in a trade . Normally I would risk at max 1% in a trade but I'm checking out if there are superior money management strategies.

[JKonstenius]

I have tried many systems that don't work. What I like about martingale is that it works on paper. Have looked at many markets for trading this strategy. Seems as though markets that let you bid and ask are the best such as stocks. Have not been able to find any automated software for this method. I first got the idea from a guy I met trading wheat using the you can't lose trading commodities book. He doubled down into massive quantities of futures before he took a small profit. One intersting idea was to do this with a spread so your range would be known in advance such as crack or crush.

Jeremy

[momentom]

The thing that kills martingale is you are risking big to make small. Also, the distribution of the losses in a live sample WILL put you out of business when the row of losses is long enough - and it will be eventually.

[Sparrow]

Some more info on trading and Kelly

some more info
more detailed

Edit:

Oh i was wrong in the original post, using the formula can lead to successful trading. Larry williams who used it for winning the futures worldchampionship switched to another strategie though.

[JKonstenius]

Was searching the net for more info and found this interesting product.

http://www.stocksystem.com/


Aparently they use a linear averaging down system vs the non linear escalation of martingale. I plan on using thier idea in a Roth using blue chips.

[Clym]

This post reminded me of a martingale system that i bought back around 1990 when I was first interested in trading.

I did a little searching and it looks like the author has died, the software is no longer for sale, but the documentation is here.

the algorithm explained
http://www.petereliason.com/sts/book_ch11.html
main page
http://www.petereliason.com/sts/title.html

[Trvlwanderer]

For day and swing trades, martingale may certainly blow you out quickly. In fact, I would surmise that fading out of a losing position will show a greater bottom line. I've done both and averaging down shows consistent deeper losses in my journal while anti-martingale is consistently better.

I have, over the last year, begun a very strong practice of averaging up into winning trades and the results have been staggering. Especially considering retracements and insuring the trend continues. This is also backed up with a quick check of the journal. Some trades have shown a loss from the last buy, but profits have already been locked at that point. A small dip from the last buy is minute in contrast to the averaging in previously.

I still chuckle when I see martingale in action at casinos with roulette. The odds do not change each turn! With a stock, the same is likely true. Cut your losers, they may continue to lose, and in most cases do.

My $.02

[jperl]

	Quote:	Trvlwanderer
	For day and swing trades, martingale may certainly blow you out quickly. In fact, I would surmise that fading out of a losing position will show a greater bottom line. I've done both and averaging down shows consistent deeper losses in my journal while anti-martingale is consistently better. I still chuckle when I see martingale in action at casinos with roulette. The odds do not change each turn! With a stock, the same is likely true. Cut your losers, they may continue to lose, and in most cases do. My $.02

Trvlwanderer,
You need to make a distinction here between averaging down and scaling in. I would agree that arbitrary averaging down is a losing proposition, but scaling-in is not. The distinction has to do with the concept of risk tolerance used in managing a trade. If for example you have a strict risk tolerance say 2% of your account balance, then scaling in within the boundaries of your risk tolerance becomes a viable technique to limit loses. See the thread "Trading with Market Statisitics VI: Scaling in and Risk Tolerance" for a more complete discussion.

[Trvlwanderer]

	Quote:	jperl
	Trvlwanderer, You need to make a distinction here between averaging down and scaling in. I would agree that arbitrary averaging down is a losing proposition, but scaling-in is not. The distinction has to do with the concept of risk tolerance used in managing a trade. If for example you have a strict risk tolerance say 2% of your account balance, then scaling in within the boundaries of your risk tolerance becomes a viable technique to limit loses. See the thread "Trading with Market Statisitics VI: Scaling in and Risk Tolerance" for a more complete discussion.

I may have been misunderstood. I will scale in if the trade is still playing out and I need a better fill....but scaling in to lower my entry on a trade that is getting away from me is not a good idea. At least that is what my experience over the years has proven.

Now investing....different story. scaling in over time while my margin of safety is still viable is very effective for solid stocks.

Maybe I misunderstood the OP.

Trvl.