To Martingale Or Not To Martingale?
with version 1.4 I did introduce a linear martingale approach as default.
That means that the lot size for additional orders will be increased following a mathematical rule. As for everything this is optional, and you can come back to a “no martingale” approach by setting “martingale_strategy” to 0 (no martingale).
But let’s look at the different rules and then discuss the pros and cons of using them.
Actually there are 4 martingale options:
this is the simplest one. The sequence is 1, 2, 3, 4, 5, 6… and so on. So if we start with 0.1 lots, the second order will be issued with 0.2, the third with 0.3, etc.
the real Fibonacci sequence is 1, 1, 2, 3, 5, 8, etc but we skip the second “1″ and my sequence is: 1, 2, 3, 5, 8, 13, 21… and so on. Each number is made of the sum of the previous two. So if we start with 0.1 lots, then we’ll have 0.2, 0.3, 0.5 etc
this is the “classical” martingale. You have an option that is the “exponential factor”. It is the multiplier we’ll use to increase previous order lot size. By default it is 2 but you can set to any value even fractional and even below 1 (so you’ll have an anti-martingale approach). But let’s do some examples:
With exponential_factor 2 (EF 2) the sequence will be: 1, 2, 4, 8, 16, 32 etc as we are multiplying by 2.
With EF 3 the sequence will be even more extreme: 1, 3, 9, 27, 81 etc as we are multiplying by 3.
But we can also have an EF 1.2 and so we’ll have: 1, 1.2, 1.44, 1.73, 2.07, 2.49, etc as we are multiplying by 1.2.
If we use an EF of 0.8 (so below 1) we have what is called an “anti-mantingale” as the sequence will be decreasing and not increasing as before. So the sequence with EF 0.8 will be: 1, 0.8, 0.64, 0.51, 0.41, 0.32, etc.
In other words you can tell Crescendo to increase/decrease each order lot size by a specific percentage. In fact if you want to increase the lot size by a 10% for each additional order you can use an EF of 1.1, if you want to decrease the lot size by a 10% you use an EF 0.9 as each 0.1 in of the EF more/less than 1 increases/decreases by a 10% the lot size.
As we’ve seen with exponential martingales we can have a infinitely large numbers if we give them the time to grow. That can cause a lot of problems if the trend continues to go in the “wrong” direction. The lot size can potentially grow (exponentially). To avoid that problem I developed the logarithmic martingale strategy. using logarithms helps us keeping the maximum reachable lot sizes low independently from the number of trades that we have open. The larger increase in lot size come at the beginning of the sequence.
So a sequence using default settings will be: 1, 3.76, 5.40, 6.56, 7.44, 8.16, 8.80, 9.32, 9.80, etc… as you can the difference between the numbers of the sequence decreases and that is the greatest advantage of the logarithmic martingale approach.
Using martingales can be a risky business as we are increasing the lot size of orders, so we are using more margin and if the trend continues to go against us we are widening the loss. Martingales have a bad reputation for that reason. But if used well they improve performances dramatically. The trick is use them wisely by finding a right setting for the series used to increase the lot size and most of all on WHEN to use them.
But also martingales help a lot in coming back to profit as we are shifting the breakeven point much closer to the actual price. The more “extreme” is the martingale, the closer the breakeven point will be and so the easier will be to come back in profit.
They key is finding a good balance between the pros and the cons of using martingales. So use them but “cum grano salis” as latins used to say.
Version 1.4 helps a lot in that as you have 4 martingales options to use and we’ve seen how they work and most important with the “check_TrendScore_add_trades” set to true, Crescendo will open new additional orders ONLY when the trend score is back to the side of the first original order. That is a really important change in the strategy as it’ll lower the number of trades and so the number of lots used by your positions. This lets the use of martingales in a much safer way than before as the orders are issued only when there’s a real chance that the trend is back to our side.
On version 2.0 Ultimate I’ll also give you the chance to write your own sequence, so you can do something like: 1, 1, 2, 2, 2, 3, 3, 3, 3, 4, 4, 4, 4, 4, … or 1, 2, 0.5, 0.25, 1, etc.