Forex Trading Money Management - Martingale and Anti-Martingale
In order to achieve success in Forex trading it is necessary to have a right money management system besides the trading system. By changing the lot size trader can build his account more efficiently.
You can change the trading lot size depending on the equity or depending on the result of the last trade. It can be done either by increasing the lot size or decreasing. This is the aspect of your money management system. The proper money management system can make your trading system more profitable.
One of the strategies to vary the lot size is called Martingale. It first came as a strategy of playing in casinos. In simple words a trader after losing trader doubles the lot size for the next trade. The winning trade should cover the losses of the previous trade and make a profit.
Theoretically with risk management based on Martingale you will always win. However there is a requirement that you need to have unlimited funds in your account. Fore instance if you betting one dollar and using Martingale strategy each time you lose, then after streak of 10 losing bets you will have to bet 2*2*2*2*2*2*2*2*2*2 = $1024. In my opinion it’s not worth it to bet that much to have $1 in overall profit if I win this time.
If you doubt that there is a probability of having streak of 10 losing trades then you were trading Forex not long enough. I explained the reason for the probability of losses to increase due to broker’s spread in previous post.
Another approach is anti-martingale. Using this approach you decrease the lot size when you lose and increase it when you win. You increase by 2 when you win. This approach allows you to build you account exponentially. However the account grows exponentially only if you have mostly winning trades. Otherwise if you have a streak of losing trades and you lose 20% of you account you need to make 25% of your current account to get back where you were. If you lose 50% of your trading account then you have to make 100% of the current account size just to get even.
So which approach to use in your trading? I don’t know. However there are many traders who successfully use both approaches and different combination of them. Therefore before you commit any money in any system you need to thoroughly test in on a demo account.
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I really liked your blog!
I really liked your blog!
Hi Albert
Thanks for the great first lesson!
One possible way to try an Anti-Martingale Strategy is to split one’s trading account into two regions, say 85/15. The 85% level is only increased after winning trades making a new high, NOT after losing ones. A normal risk figure (say 2%) is calculated on the whole margin remaining. A much more aggressive risk figure is calculated (say 50%) on just the margin in the top region, i.e. up to 15% of total margin, which will be a maximum of 7.5% of total margin in this example. The larger figure of the two is the amount risked on the next trade. Unless one has a whole slew of losing trades, draw-down will rarely drop below 80% of the previous highest balance. After each losing trade, the amount risked on the next trade is sharply reduced. However, the converse is not true as the 85/15 margin level is reset whenever a new high is achieved, protecting much of the gain. This can be modeled in Excel using the RAND() function for each trade tested against the expected probability of the trading method under review. Of course this is easier to model with fixed S/L and T/P. The equity curve can be pretty spectacular, even with only 60% probability of a win from each trade!
The other thing to consider (and this applies to virtually all robots for sale) is to ONLY pick a trading system where the Stop Loss is significantly smaller than Take Profit. Then one won’t be relying on a high success rate (usually curve fitted from historical data which may fail going forwards) to turn a profit overall.
Probably depends on your trading ability. I agree is not worth it for $1 profit, but its a profit. So I guess thats better than a loss…