Hi, guys, Andrea Unger here. And I want to discuss today Martingale/anti-Martingale—not the way I did in my book. You know, I published a book where I talk about position sizing and money management, and in that book I strongly suggest to use an anti-Martingale approach, which means that you increase your size when your account is bigger, larger, and if you reduce your account due to a number of losses, you have to decrease the size of the next trade.
This makes sense; I demonstrated with numbers that it makes sense. But sometimes, you stumble across strategies built with Martingale; and they say Martingale, greed or things like that to make money and so on. So, are these all wrong? Not necessary, and I want to show you something.
Let’s imagine you have an approach where you say, “Okay, I buy one here, the market is falling, I buy two here and here I buy three, okay? And so on. So, the Martingale that sometimes is proposed if you go on buying, increasing the size, and they say “no stop-loss”; the stop-loss is the size of your account. Which, if you read it properly, is dramatic. It means that you lose all your money. They don’t tell it that way; they say it in a different way so that it sounds more professional. By at the end of the day, the result is the same. You have no longer money.
But now, let’s say that I want to have this Martingale approach, but I want to have it controlled—under control. I buy one here, two, three; but at a certain stage, I want to limit the maximum number of contracts that I am adding up. And in this case here, for example, I have one, two, three… I have six contracts. So, if I say I’m ready to buy, in a falling market, at different levels, one, then two, then three contracts, but at the end of the day, I don’t want to have more than six contracts in my account; so, I control the maximum number of contracts and once I have six contracts, which will have more or less an average here—more or less, okay? From this level, I calculate a stop-loss level where I will close my position of the six contracts, and where the loss that I’m suffering is still in line with my risk profile.
In this case, it’s true that I have a Martingale approach, but I still have, under control, the losses of the approach. I’m keeping them smaller than the maximum level I can allow to lose in a single operation—where the operation is the small number of all the edges. There might be even more, but this is an example just to get you with six contracts maximum.
So, actually, Martingale, no or yes? Yes, now-ish, but you have to keep it under control. If you keep it under control, this can be an interesting strategy to add to your portfolio with all the other kind of strategies; one more tool of diversification. It must be under control. Risk must be under control. Stay tuned. More things to come. Ciao.