Martingale Mania I ~ The Beginning

Filed Under (Journal) by Casey on 18-08-2009

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Well… since I have time on my hand because I have kinda stop trading… I thought I would put down my thoughts about Martingale. While I do mentioned a lot base on my experience with Best Forex Sniper, I believe this should apply to any Martingale system.

Since toying around with Martingale system, I always thought that Martingale was the name of the person who well… founded the Martingale system. But after doing some research… it seems that no one knows how did the name Martingale came about.

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Even in Wikipedia, there are two articles on Martingale which were relevant… Martingale (probability theory) and Martingale (betting strategy) never actually mentioned a person call Martingale who founded this Martingale theory.

I guess Martingale is left to our own imagination of who or what this word represent… :) For me… it’s Megan…

Anyway… for forex. The first time I encounter a Martingale system is with Forex Funnel. I never actually toyed around with it because I knew the danger of it. I was very afraid of how it will kill off once account balance.

It was until I got my hands on Cyborg did I started to venture into Martingale system for forex. Seeing how silly scalping can be at times… I thought maybe Martingale could work in forex… I wrote a piece a long time ago ‘Martingale Strategy‘ and still think that it would work because of price retracing back/ Fibonacci Retraction principles.
With Cyborg EA, the theory was relatively simple. That is if I understand the codes correctly, Cyborg uses RSI and Stochastic to enter the trade.

Oh before I continue, it seems that Martingale will work very very well when market are trading sideways. I guess that is how I manage to bang very well on the last two days of July when I used Sniper on my account.

Anyway, Cyborg also has a time filter and does not enter during certain hours. That is why at times it trades only from Tuesday to Thursday. That was part of the strategy which Cyborg uses and so far it has been pretty good in terms of returns.

However… one stop and it could wipe out once account. It was for that reason that I only set Cyborg to take a maximum trade of 4 levels. I guess if it does trend then the 4th level of Martingale would be just right. But other Martingale users would suggests that it would be a lost opportunity as at times prices will move high enough to cause it to retrace back.

Well, it’s up to any individual how much risk they want to take.

The other idea that took me to Martingale was that in Cyborg, this EA took trade on 3 currency pair… and that got me thinking that the possibility of diversifying currency pair would help to cushion a drawdown should Martingale starts to fail on one of the currency pair. The other currency pair would help sustain or assist to reduce the drawdown. (Forex Funnel only suggested to trade one currency pair)

But this was I believe to be a half bake idea and which was the idea that got me into Best Forex Sniper in the first place. It traded or recommended to trade 6 currency pair. And I though ‘Yeah… I think this would work. The more currency pair it trades the less my drawdown effect there would be’

As last week have shown this idea needs to be refined because that was not necessarily so. The more currency pair it trades, the higher the possibility of having a larger drawdown should a few currency pair begin to trend.

Instead of following blindly, the question which I should have tried to ask and answer was which currency pair and how many currency pair I should trade.

So which currency pair?

Daleen wrote to me and suggested I should not trade the major currency pair. With Sniper I was trading USDJPY, GBPUSD, NZDUSD, EURGPB, EURCHF and AUDCAD. And Sniper has the capability of trading all the 19 currency pair.

Major currency pair as define by FXOpen are EURUSD, GPBUSD, USDJPY and USDCHF. But is that so? How do we define what are the major currency pair? Is it define by the volume traded? I don’t know….

What I do know however is that what killed me was GBPUSD and EURGBP when GBP began to trend after last weeks. Actually GBP started trending at the start of August when they announce their Manufacturing PMI results.

Suffice to say… that took a lot from my account. Oh… and USD also did a ding dong bell on me which added to my woes. This ding dong also started with USD Manufacturing PMI results and ended with their Non Farm Payroll news.

EURUSD01

Since trend and volatility play a great part in ensuring Martingale success. Any currency with USD, GPB, EUR or JPY should be avoided right? Well… I don’t think that is entirely accurate. Any news would have an effect one way or another may it be AUD, CHF, CAD etc etc. If the news release either good or bad does not come now, it will come sooner or later. And when it comes, I am sure this will have an effect on the currency pair.

Another thing I have to consider is the opposite effect of a currency pair. For instances, EURGBP and GBPUSD. They have an opposite effect when EURGBP moves up GBPUSD moves down…

For Sniper, the theory of entry is that this EA allows one to short when the price is moving upwards and go long when the market is moving downwards. In the case of EURGBP and GBPUSD, Sniper took a short Martingale position when EURGBP was moving upwards and took a long Martingale position when GPBUSD was moving downwards.

In a way, I was slammed twice on the same period of time…

GBPOpposingEffect

Lesson: Trade Currency pairs which does not oppose on to another in price movement.

Another point Daleen mentioned to me was the number of currency pair I took. As mentioned before I took 6 currency pair on a 1000k plus balance.

Being as naive and ignorant as I was, this amount was not enough. I took 2 to 5 days of testing on my live account to claim or justify that the minimum drawdown was to be only 3%. There was not enough data for me to declare that. I guess there is a reason why we do something call a live demo test.

Well, to answer the question of how many currency pair should one trade? Well, it’s obvious to know how much money or capital one has. And how much should one have to trade one currency pair?

Now I guess this is where some calculation should come in I guess. Daleen suggested to have 10k unit (cents/dollar depending on micro/mini/standard account) to trade one currency pair.

I have done a simulation on excel spreadsheet. The usual take profit and limit order is mostly 30pips apart. So you will be able to see that, from one level to the other is 30 pips apart. The graph below shows a buying martingale positions.

MartiCal02The table shown here is the worst case scenario and it take it right up to level 10 on the martingale system and stop out at the 11th level of another 30 pips. Thus in total, the price would have to move a total of 330 pips against you without retracting back another 30 pips and it would take out roughly $6,032.34 of your balance.

Ouch!! One would say…. so if you have $10k in your account it would mean taking out 60% of your account balance.

So taking by this worst case scenario and if one were to risk 60% which would mean one needs to have at least $10k to run this strategy.

In summary, when trading Martingale strategy, we need to be aware of which currency pair to trade and how many currency pair we can afford to trade. I believe I need to use the word afford because with a dangerous strategy such as Martingale, we need to be careful not to expose ourselves too much in the market.

Now we roughly know how much we are planning to risk, the next question would be what are the rewards that we are looking to gather?

What is the potential here when using this strategy? Well, I don’t really know. For every cycle, the profit target is 30 pips, meaning the net profit for every successful Martingale round is very different depending on the level it is at.

By a rough average calculation, it would probably be about $30. Taking a look at the scenario of the above, the lose of $6,128.86 against average of $30 (depending on the way the EA exit) it would mean one would need roughly around 204 wins straight to claw back to break even…. give or take a few dollars.

But that is a very very rough crude calculation. maybe 150 trades to really claw back our losses. Taking a look at Cyborg, when I took a hit twice in a row… it took our one month of my profits. And in that one month, I took a total trade of roughly around 36 of profits for 1 hit on GBPUSD to wipe it out… Interesting no?

I can’t see the future… so how can ensure that I in the next month I would not be taken out again before I reach another 36 profitable trades before hitting another stop to break even?

I just can’t… I just need to risk it and manage it properly. For Cyborg, I just need to stay out on any major news. Other than that… I at the point in time I am risking 10% to currently maintain 23% per month (Perfomances As Of End July 09)

With Sniper…. well…. I need to put in more thought.

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