Search
× Search
Thursday, March 28, 2024

Archived Discussions

Recent member discussions

The Algorithmic Traders' Association prides itself on providing a forum for the publication and dissemination of its members' white papers, research, reflections, works in progress, and other contributions. Please Note that archive searches and some of our members' publications are reserved for members only, so please log in or sign up to gain the most from our members' contributions.

Investing with Martingale - An Experiment with RSI+Martingale Position Sizing

photo

 Jared Broad, Founder at QuantConnect

 Monday, June 9, 2014

For fun I did an experiment with Martingale position sizing using a basic RSI indicator to determine entry and exit points. I wanted to demonstrate the common pitfalls people run into when using martingale style techniques.


Print

1 comments on article "Investing with Martingale - An Experiment with RSI+Martingale Position Sizing"

photo

 Jon Grah, Trading Systems Automation Expert @ AwarenessForex.com

 Monday, June 16, 2014



This is a perfect example of how we can get "too abstract" as group member Alex Krishtop recently wrote about. The article cited in the OP starts off with the usual assumption about game theory where you have (or need) unlimited capital to start and your edge is little more than a coin toss. But because capital/leverage is limited, therefore the risk of ruin using martingale is only a matter of time. I have proven time and again that you must have an edge and use proper limits to ensure you are speculating properly (adding sell side liquidity at the correct times; see link at the end). No one in their right mind would use unlimited levels with such aggressive position sizing. Other limitations include:


a) most traders learning to use cost averaging position sizing will not be able to do it properly because of the amount of confidence required to hold the course on EACH setup


b) ability and willingness to take a loss


c) testing environment required to ensure your edge makes sense over the long term (which greatly assists with overcoming virtually all the other limitations)



Martingale (mean reversion, averaging, fading, etc) without a proper edge and risk management parameters WILL be a disaster waiting to happen. I suggest a better understanding of the role of a speculator with the following book: Trading and Exchanges by Larry Harris. There is a free 'draft' version floating around but you should get the full version from the library, google books, amazon.com, etc as it has a very thorough and easy to understand overview of market microstructure (why derivative markets exist, how markets are formed, different category of traders, roles of each category, etc). Most profit-motivated traders using martingale (or any strategy for that matter) do not understand why they are trading (chapter 8). Chapter's 3, 7, and 9 are also worth a look. The entire book is worth a skim for any aspiring professional trader or market participant.



I'm not talking about "I trade to make a profit", I'm talking about a basic understanding the different market participants [both 'buy side' and 'sell side'] and which type or category of participant you will be. Then you form the strategy to perform your DUTY to the markets...and a grid is an easy and scalable way to start. Especially with the type of gearing that martingale will provide, you need to be a well-informed trader to use grids properly. The majority of traders using averaging strategies with the hope of guessing the correct direction are usually not well informed. They hope they do not blow up or have to face deep drawdowns which will result in panic or loss of confidence.



This was explained more in a previous discussion: Grids and Martingale: Why Not??? http://www.linkedin.com/groupItem?view=&gid=1813979&type=member&item=5854937373489537026

Please login or register to post comments.

TRADING FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS
Terms Of UsePrivacy StatementCopyright 2018 Algorithmic Traders Association