I decided I needed some numbers to back up my intuition.
I threw together a spreadsheet that does a crude simulation of a Martingale system. It simulates 1000 random trades, then trades it as you specify: win%, win size, loss size, M bailout point, M progression. It shows the results of trading those random trades without any Martingale, and trading them with your specified Martingale parameters.
BTW I should point out that while I was working with this, simulating a system with 50% wins, I saw one case where I got TWENTY-ONE CONSECUTIVE LOSSES. That's a freakishly uncommon result, a chance of 1 in 2 million, but it's the kind if thing that CAN happen. That's the kind of event that can kill you, no matter how well-capitalized you think you are for Martingale blowups.
So, what did I see in my simulations?
With a random coin-flip system -- 50% wins, win size = loss size -- the Martingale is also a coin-flip. Sometimes it helps, sometimes it hurts. No benefit that I can see. If the system result is random, the M results are random. This was true for all progressions I tried.
With a winning system, it gets more interesting. With 50% wins, a 2:1 W/L ratio, and bailout at level 5, the Martingale consistently made about 2.0-2.5x more profit. HOWEVER you could get very similar results without a Martingale, just by increasing your fixed position size by about 2.5x.
There are a zillion ways you could play the numbers, and I've attached the spreadsheet for your own experimentation. Let us know if you find a miracle Martingale. From my experiments, my conclusions are:
- A Martingale will not turn a losing system into a winner. Usually the Martingale loses worse.
- If the system is a random coin-flip, the Martingale results will also be random. Sometimes better, sometimes worse.
- If the system is a winner, a Martingale will increase the profits, but you have all the Martingale problems. You can achieve similar returns just by increasing your position size, and you will have fixed known risks, a more consistent and sane equity curve, and no worry of a Martingale blowup.
- If you have a high-win% system, your chances of long strings of losses are reduced (but NOT eliminated). E.g. for a system that wins 70% of its trades, the chance of N consecutive losses is (1-70%)^N; the chance of 7 consecutive losses is 0.30^7 = 0.022%. If you can survive 6 consecutive losses, you have only 1 chance in 4500 of blowing up with 7 losses. But remember those 21 consecutive losses with 50% wins... If you never blow up, your closed-equity curve is a beautiful straight line. But once again with that 70% system you could get about the same results just by increasing your position size by about 1.7x, and you have none of the Martingale risks.
- Bailing after a few consecutive losses results in smaller blowup losses, but the blowups happen more often. Bailing after more consecutive losses causes fewer blowup losses, but they're bigger. The end result tends to be similar even though the equity curves may look very different.
- If you're lucky, you won't hit many blowups, and you'll make more money than without the Martingale. If you're NOT lucky, you may hit a lot of blowups, and you'll lose far more than you would have without the Martingale. If you're like me, the Trading Gods will guarantee you see the latter result, and the Martingale will kill you.
Therefore: I conclude that Martingale Mania is a will-o-the-wisp, a fantasy. Martingales hugely increase your risks without providing any benefit. Martingales won't help you unless your system is already a winner, and if your system is a winner, a Martingale is a bad way to increase its returns.
Just Say No to Martingales. |
