Holy grail

[epic767]

Wel maybe not. However, what im about to show you is a new interesting approach to money management that might work.


Say that you buy one lot currency at 50. Then it moves down to 42 and you buy one more extra lot. But it keeps moving down another 8 pip to 34 and then you buy 2 more lots(doubling your lot size). But it keeps moving down yet another 8 pips to 26 there you buy yet 4 more lots. It keeps moving down to 18 and you buy 8 more lots, but it keeps moving down to 10, where you close your position.

If one lot is worth 10 dollar, spread is 1.2(as it is with oanda on eurusd)you have incurred losses of ((8+1.2)+(8+1.2)+(16+2.4)+(32+4.8)+(64+9.6))*10=1385.6 dollar.

And lets say that your chance of winnning is 50%. Your take profit is 8pip. If chances of losing is 50%, then the the probability of having 5 consecutive losers as the example illustrated is (0.5^5)*100=3.125%

And the rule is to only close after the market goes against you 5 times in a row.

If you do 100 trades, given what is said above, these losses and profits will occur:

Losses: 3.125*1385.6=4330
Profits: ((100-3.125)*80)-((100-3.125)*(1.2*10))= 6587.5


Result= 6587.5-4330=2257.5 dollar.

Well, one could argue whether the the chance of winning is 50% if you go against the trend in a trending market, so obviously, this method should be applied in ranging markets. One could also argue whether 5 losses(with 8pip) would ever happen in a ranging market. One would also employ this method with discretion, and evauluate whether the market is trending or ranging or change the rule of closing after 5 losers, to only 2 losers,if one comes to the conclusion that the market is beginning to trend.

And of course, if you have been trading for a while, im sure your chance of winning is more than 50%, so the premises given in the example could have been better. And if you are only trading during ranging markets you would automatically have a winning percentage higher than 50%, if you buy at low and sell at highs, because 5 losses of 8 pips in the same direction in a ranging market isnt too common.

Well, i just came up with this idea now. I would like some input. Im also sure that there are similiar approaches to take profit that increases your probability. So I would appreciate any suggestions on money management techniques swhen it comes to take profits.

 

[options]

Talk sense son. You have those losses 5 times in a row and you haven't got an account to trade with.

Put it into practise and then come back in 6 months and tell us what happened.

 

[epic767]

well, that obviosly depends on how much leverage you use. If 1300dollar is 0.001% of your capital, you could sustain 1000 losers in a row.

 

[new_trader]

well, that obviosly depends on how much leverage you use. If 1300dollar is 0.001% of your capital, you could sustain 1000 losers in a row.

How do you calculate 1000 losers in a row? Do you think if you used 10% you could only sustain 10 losers in a row?

Hint: After your first loss 0.001% of your capital is not 1300

 

[Hoggums]

How do you calculate 1000 losers in a row? Do you think if you used 10% you could only sustain 10 losers in a row?

Hint: After your first loss 0.001% of your capital is not 1300

The problem with this is that in order to keep your drawndowns to a minimum your trade size would be so small that you would be better off putting your money in a savings account for all the profit you'd make.

 

[Pat494]

If you want a system which is a little similiar but probably with better chances then I suggest you have a look at laptop's system in his journal.

 

[themaestro]

Epic am afraid your calculations violate the laws of probability, if your probability of being correct is 50% then your overall profit expectation must be zero (neglecting commission charges), for you to have a positive expectation you must be correct more then 50%. You could apply your theory to the toss of a coin and if your calculations were correct then it would also be possible to guarantee making a profit (I.e. betting until the number of heads is 1 more then the number of tails or until there is 5 more tails then heads. I think the error in your calculation is as follows. You calculate the probability of five consecutive 50% outcomes as 0.5^5=3.125%, correct -but this is not the only way you can lose, e.g. it could go against you 8pts 4 times in a row then move up 8pts then back down 16pts. The actual calculation to work out your overall win-lose ratio (and what your average stake would be) is more complicated. If anyone has the time to work this out, ill be interested in seeing the calculations (I would probability try using Markov chains, but there may be a simpler method am forgetting about)

 

[JTrader]

well, that obviosly depends on how much leverage you use. If 1300dollar is 0.001% of your capital, you could sustain 1000 losers in a row.

If US$1300 was just 0.1% of my capital, I'd make it last a life-time, and would have no need to make any more money.

I'd have US$1.3 million dollars.
I'd spend around $600,000 maximum in total on a lavish house, furniture, car etc..
I'd put the rest in the best bank account going making roughly 5% interest PA ($35,000), and I'd probably live very comfortably off the interest......

 

[sbguy]

I can see this working if you had a lot of margin. If you're starting lot represented .5% and you doubled up each time the market went against you by one "metric" you could sustain five consecutive losing moves before getting a margin call (400:1 margin) and losing about 30% of your capital. Obviously that would be a bad thing. The question is does anyone know of a market that never goes in one direction for more than 3-4 "metrics" before coming back by one "metric"?

If you used a hourly timeframe for example and averaged two wins a day that's ~240% a year. Not bad if you manage to avoid wiping out your whole account. Any thoughts?

I thought fx would be good for this but it can bounce around in a ten point range and then take off for 80 points for no apparent reason, so maybe not.

 

[Hoggums]

I can see this working if you had a lot of margin. If you're starting lot represented .5% and you doubled up each time the market went against you by one "metric" you could sustain five consecutive losing moves before getting a margin call (400:1 margin) and losing about 30% of your capital. Obviously that would be a bad thing. The question is does anyone know of a market that never goes in one direction for more than 3-4 "metrics" before coming back by one "metric"?

If you used a hourly timeframe for example and averaged two wins a day that's ~240% a year. Not bad if you manage to avoid wiping out your whole account. Any thoughts?

I thought fx would be good for this but it can bounce around in a ten point range and then take off for 80 points for no apparent reason, so maybe not.

I did a lot of testing on this, using about 5 years of EUR/USD tick data. The basic premise being that you doubled up if the rate moved against you, if it moved further beyond - you doubled up again until some bail out condition was hit. Ignoring the limits of Margins and trade sizes on your account - even if you could cope with 12 consequtive losses you run the danger of wiping yourself out = as was experienced in the back testing.

Using 3,4,5,6.. etc losses as a limit resulted in a loss - particularly when you take into account spreads and overnight interest charges.

The thing that really kills this system is when a rally starts and the index/rate starts to trend strongly in a direction - and you are on the wrong side of it.

With a 5 loss limit your losses will be 16x greater than any win, this means you need over 94% of your trades to win - ignoring the effect of spreads/slippage.

 

[sbguy]

I agree 100%. I'm just wondering if there are any markets that behave in a way to suit this system. For example some big companies (shares) seem to behave suitably. They have large ranges on individual bars but they seem to range trade most of the time. If they do go for a run they come back at least for a touch within a few bars. I'd like to test that out but I don't have access to good charts.

 

[Hoggums]

I agree 100%. I'm just wondering if there are any markets that behave in a way to suit this system. For example some big companies (shares) seem to behave suitably. They have large ranges on individual bars but they seem to range trade most of the time. If they do go for a run they come back at least for a touch within a few bars. I'd like to test that out but I don't have access to good charts.

I'm not sure - I think you're playing with fire - Perhaps some closely related ccy pairs - such as EUR/DKK or EUR/CHF. Or at the money options?

 

[fibonelli]

Wel maybe not. However, what im about to show you is a new interesting approach to money management that might work.

Say that you buy one lot currency at 50. Then it moves down to 42 and you buy one more extra lot. But it keeps moving down another 8 pip to 34 and then you buy 2 more lots(doubling your lot size). But it keeps moving down yet another 8 pips to 26 there you buy yet 4 more lots. It keeps moving down to 18 and you buy 8 more lots, but it keeps moving down to 10, where you close your position.

This sounds like a pound cost averaging down system. Can work when investing over a long timeframe if you've done your homework on a bombed out security.

Sounds completely bonkers when applied to trading since you're adding to your losses.
It's the complete opposite to pyramiding your position.

 

[sbguy]

It's not quite averaging down, it's doubling up. If the market goes against you even five times it then only has to go your way once for you to profit. AUD/NZD looks interesting, it jumps up and down 10-15pips all day (except yesterday) and never goes one way more than twenty/thirty pips before coming back.

 

[TheBramble]

This is a Martingale system. It wont work in practise because you will never have enough funds to cover the inevitable worst case of consecutive losing trades.

 

[rols]

It's not quite averaging down, it's doubling up. If the market goes against you even five times it then only has to go your way once for you to profit. AUD/NZD looks interesting, it jumps up and down 10-15pips all day (except yesterday) and never goes one way more than twenty/thirty pips before coming back.

Ah. Our old friend Marty returns. He is a false friend, promises much but will kick you where it hurts when least expected.

Much deliberation about Marty systems on forex-tsd.com including one system called The Terminator.

And that's what it does. Terminate. Your account.

Well worth a read.

 

[new_trader]

It's not quite averaging down, it's doubling up. If the market goes against you even five times it then only has to go your way once for you to profit.

This is completely incorrect and a travesty of probability and trading. Due to the exponential growth of the bets using the martingale system, only a lunatic would use it on anything wih less than FIXED odds close to 50%.

 

[zagreb]

During time I tried and tested many many such tactics trying to find what works and what doesn't.

Answer was simple, nothing beats good old skill and willingness to take responsibility (controlled risk). And it is also easiest method actually.

 

[minx]

I'd have US$1.3 million dollars.
I'd spend around $600,000 maximum in total on a lavish house, furniture, car etc..
I'd put the rest in the best bank account going making roughly 5% interest PA ($35,000), and I'd probably live very comfortably off the interest......

Might be worth reading up on what inflation will do to your savings in 20 years time. And if you're relying on the real-value of your house increasing then you could also be bitten on the ass by this one. However if it was $13m you were talking about.....

 

[Pat494]

If anyone can, perhaps they might calculate the stats on the 1,2,3 system.
Just to refresh or instruct any minds unfamiliar with the system it runs as follows:-
Put your initial stake on say £1
If that loses put on £2
if that loses put on £3
if that loses return to £1
Imho the system may have some merit if one's success rate is high enough. Perhaps a win rate of > 52% over time would show a profit ( just for these purposes one might have to assume a fixed x profit ). Therefore my question is how high should the win rate be, to break even ???
Anyone ?????????