In the previous article, we introduced the martingale strategy(What is The Martingale Strategy?). Can it really make a profit?
Theoretically, if there is no limit to funds, the martingale strategy will not lose. But in real trading, our funds are limited. Even if there are tens of millions of funds, in the face of a large one-sided market, there is nothing we can do. Eventually, there is only the fate of a forced liquidation.
The evolution of the martingale strategy.
Grid trading: Change the multiple position adding of the martingale to equal position adding. This reduces the overall position and further reduces the risk. At the same time, it also reduces the return.
Forward martingale (trend martingale): This is also a martingale approach that is widely advocated in the market. It is to take trend orders and hold positions. As long as the identified signal direction remains unchanged, positions are continuously added. However, this strategy has a drawback. If entering at the top of a trend, one will be deeply trapped.
Reverse martingale: This is the classic martingale strategy and no introduction is needed.
Scalp martingale: Scalp martingale is a martingale strategy evolved from the scalp strategy. It is characterized by small profits, high winning rate, and holding losses firmly.
How to judge the quality of a martingale strategy?
A good martingale strategy must have the following characteristics:
(1) Fixed capital forced stop-loss.
What is this for? Risk control. A good martingale strategy must have risk control. For example, with 10,000 dollars, if the drawdown reaches 30%, the position will be closed and then start anew, instead of blindly holding on without a bottom line. The proportion of position closing and the specific amount mainly depend on the strategy itself and the size of capital. But it must exist.
(2) High risk-reward ratio.
What is a high risk-reward ratio? If I bear a drawdown loss of 5,000, how much can I earn when I make a profit? If I can also earn 5,000 when making a profit, then it is very good. But if I lose 5,000 and can only earn 500, then it is obviously unreasonable.
Another method is to look at monthly returns and drawdowns. If the monthly return is 5% and the net value drawdown reaches 20%, then such a strategy is questionable.
(3) Time concept of return-risk.
There are many asset managers in the market who turn martingale into little martingale, that is, reducing positions, reducing both the original risk and return, and then running for one or two years until a forced liquidation occurs. In essence, such an approach is like covering one’s ears while stealing a bell. What you need to calculate is not the stability of a certain stage, but how long it will take to recover the losses after suffering a loss in this stage. This also involves the fixed capital forced stop-loss mentioned in the first point. If a strategy has a high risk and may be forced to liquidate at any time, but it has strong profitability and can recover losses or a forced liquidation within a week or a month, then this is also a good martingale strategy.
Reproduction Notes：InvestFancy » Can Martingale Strategy Really Make a Profit?