Episode 59: The Martingale Trifecta – aka Steel-Nad Trading

by robbooker on July 2, 2012

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In today’s provocative episode, Rob Booker interviews Ryan Caldwell, a private, stay-at-home trader who’s been trading for five years and has a controversial outlook on money-management theories, hedging his trades when they go against him, and picking a direction in the market as if he might actually know which way the market is going to go next.

As Rob and Ryan look at the Martingale Money Management System, we have no doubt that this rousing discussion will spark the emotions and opinions of The Traders Podcast listeners, so please — by all means — leave your thoughts in the comments section of this episode! Join the fray!

Note: A Martingale trading methodology will increase the size of the trades in the midst of a losing streak. A true Martingale money management methodology will double the size of the trades every single time there’s a loss.

Rob recommends further reading:

Martingale Trade Sizing and the Gambler’s Fallacy

Using the Z Score to Determine Trade Size and Boost Performance

{ 8 comments… read them below or add one }

Amarsir July 2, 2012 at 8:47 pm

Well that’s the thing about progressive betting systems: they always work. Until they stop, catastrophically. Of course the better your edge at choosing bias, the longer it can run. But by the same logic you could just make bigger bets from the start without escalating.

However Martingale can make sense if you have potential to secure short-term near-unlimited backing in the event of a bad streak. If you can get, say, a government bailout, then you just double a few more times until you win, pay back the bailout, and enable your backers to say “see, I told everyone this rescue was a good idea.” That’s pretty much what happened with Chrysler, Mexico and Long-Term Capital Management, just to pick less-controversial historical examples.

(Naturally the bailor faces the same problems with progressive betting. But that’s not your problem.)

More generally, you said it’s each trader’s responsibility to pick their system regardless of advice. That’s true, reponsibility does ultimately end there. But there’s a lot to be said for taking advice rather than learning the hard way.

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Bruce Mars July 3, 2012 at 8:11 am

Wow… looking for the word…or words. This is actually a complicated subject. We have all hedged at one time or another…even if it was as simple as shorting against the USD in one trade and going long the USD in another. We close out the looser and keep the winner going and come out on top. And we all have an idea where the market is going when we put in a trade anyways…our personal bias. I watch and position in a long and a short and if one hits it closes out the other…but even when I do that I believe one of them are gonna go long over short or visa versa over the other. Where the HUGE balls….. ( Gotta float like lilly pads )… is throwing more $$$$ into the loosing trade is totally beyond my comprehension. ( IF ) you know/feel a bias of the beast and the beast bites you in the ass… ( THEN ) RUN! Cause obviously you don’t know/feel correctly. I like the idea that hedging is just another tool I can pull out of the box and put to use….I use that at the start of, or shortly after I enter my initial trade… But I think the key word here is “TRADE”. And when I trade, my speculations are based on ‘probabilities’…ie: nothins carved in stone…anything can happen. It has been proven time and time again that cutting losses small and running winners = profits. Doubling up…is gambling. I don’t/can’t put my cash into such endevors. I do however like and agree with the concept of pulling out my initial risk and playing, in your guests words….with house money. I have done and do that at times… But make no mistake here…that money isn’t “house” money. It is “MY” money. I will close with these words ( I finally found em) from a song by John Prine. “It don’t make no sence that common sence don’t make no sence no more”

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JR July 3, 2012 at 4:20 pm

I agree “Martingale can make sense”. I have seen it work successfully with Market style index’s and not individual stocks. I understand he was discussing currency pairs here but that’s another issue.

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Scott Welsh July 4, 2012 at 11:50 pm

Love the podcast. Just like a warm walk down memory lane. It was both thrilling and scary to trade this way live and it deserves attention.

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Justin White July 5, 2012 at 11:47 am

How does someone go about getting in contact with Ryan. Thanks.

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David July 29, 2012 at 7:26 pm

Rob, it’s not so much a case of Martingale or hedging being controversial, or provoking indignation; it’s a case of the math behind conventional wisdom being inviolable. Hedging gives no advantage over conventional methods because one can only ever be net long, net short, or net flat. Progressive sizing increases risk of ruin without altering mathematical expectancy. Varying position size without statistical backing that the larger sizes will likely coincide with winning trades, is merely playing a game of hit or miss. An emphasis on recovering from RECENT losses makes no sense, because all losses have the same effect on eventual bottom line. Market probabilities and behavior aren’t going to change because of the recent P/L of one retail trader. And so on. All of these are self-evident truths.

If Ryan’s TA/FA is providing him with an edge, then using Martingale is merely adding unnecessary risk. It doesn’t surprise me that he has been successful; I’ve known Martingale EAs that survive for several months, even years, before they eventually implode. No disrespect to Ryan, but the fact that he feels the need to withdraw his capital and play with “house money” tells me that, deep down, he knows he’s gambling, rather than ‘trading’.

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robbooker July 29, 2012 at 9:33 pm

David, your comments are appreciated. I’m particularly interested in your comment about hedging giving NO advantage – can you elaborate on that (if you have a moment)?

Thanks for listening, and for taking the time to write a thoughtful comment.

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Bob September 9, 2012 at 2:55 am

Rob, since you haven’t had a reply from David, let me jump in. What he’s saying above is that any hedge can be expressed identically by buy/sell operations on a position. Say you buy .1 lot EUR/USD long then sell .2 lot short–you can get the same result by simply closing the buy and selling .1 lot. Similarly, you can handle FIFO by changing trading order. That actually is how, for instance, FXDD allows you to place non-FIFO and hedging trades in your MT4 account–their backoffice changes the trades to innocent ones that net the same risk being requested by the trader.

I appreciate being able to do this because I trade a number of EAs on my FXDD account. In particular, suppose I have an EA that scalps EURUSD, and one that trades EURUSD long term. Both have winning records (and I do have such EAs). It’s virtually certain that the scalper will, say, see a short term winning short in the same period where the long term EA will see a long trend. The policy at FXDD allows me to run both EAs on one account; if I did this, for instance, on FXCM, when the scalper tried to enter the short, it would not be allowed to do so. In the back-office report that FXDD sends to the authorities, you see that I had a long on EURUSD, closed it and went net short for a very short period of time, and then went back net long (the scalper usually trades more lots than the long term EA). I see that too in reports I get from them; in MT4 I see what I expected. So there, if you will, is an advantage to me in being allowed to hedge, even though I’m not hedging (said the Red Queen to Alice–or the NFA or the CFTC or whoever it is that cares).

As far as martingale or other position size changing strategies helping, the z-score article you point gives a very good answer on that. I have seen a number of cases of winning strategies that trade breakouts (the original turtle’s strategy for instance) that add positions as the breakout seems to run–or on pullbacks, or some such. I think this is reasonable as if a pair does break out, it tends to run for a while, which gives a likelihood of multiple winning trades as the z-score concept hints.

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