Introduction:

Hey, Adrian here, founder of Enlightened Stock Trading. Have you ever seen something in a market that just really pissed you off? I, uh, I saw something today that I wanted to share with you. Usually, I’d be sending you a weekly market update right now, but there’s this one thing today that came in my inbox, landed in my inbox, that just really, really riled me.

Why Martingale Position Sizing is a Disaster:

And it’s, you know, the reason it’s annoyed me so much is because this is exactly why so many retail traders lose money – misinformation. I want to show you this email that I got. Now, the email came from Kucoin, which is a crypto broker I use. Now, I’ve got nothing against Kucoin. I actually think it’s a really great exchange. I really like trading on there, and I’ve done very well out of them, but I do have a problem with this.

They sent this email and as soon as I saw the headline, the subject line at the top here, I knew I was going to be annoyed. Futures Martingale is coming. Now, if you’ve been trading for a while, you probably know that Martingale is the worst thing to add to your trading.

Martingale is a position sizing strategy whereby you add to your position, or you double down on your position as it moves against you. And then when it moves a little bit in your favor, you get out, hoping to basically capture, or recover your initial losses. And the reason it’s so bad is actually the worst thing you can do for your trading account.

Martingale trading, or Martingale position sizing, adds to losing trades. And it not only adds to them, you’re essentially looking to double the position size when you lose a certain amount of money. So that when the instrument that you’re trading rallies just a little bit, you get back to break even.

So it sounds really clever. Until the market really moves against you. Because if the market’s going sideways, up and down, up and down like this, Martingale is not so much of a problem. It’s not, still not a brilliantly clever strategy, but it doesn’t really hurt you that bad. But when the market goes against you, and you double down, and it goes against you even more, and you double down, and it goes against you even more, and you double down, then, it really starts to become a disaster.

It only takes a couple of trades where you’re doubling down, increasing your position size, before you find yourself in a really, really deep hole. And here’s the thing. If you want to be successful at trading long term, you have to protect your capital. Protecting your capital means you’ve got to keep your losing trades small, and you’ve got to let your winning trades get big.

Now, that way, you can afford to be wrong many times in a row. Because your winners will make up for it. Martingale does exactly the opposite. Martingale position sizing gives you lots of small winners and the occasional very, very large, typically catastrophic loss.

The Incentives of Pushing Martingale Position Sizing:

Now the problem is the people who push stupid position sizing strategies like this don’t tell you the whole story. Now why would a crypto broker be pushing Martingale position sizing? What do you think? Well, a mentor of mine a long time ago said to me, incentives matter. So what you’re gonna do is sit back and think about their incentives.

Why would a crypto broker be incentivized to push a strategy like this? Well, the answer is that it causes traders to trade in increasingly larger and larger volumes. And if you trade in larger and larger volumes, what does the exchange get from that? Spread and commissions, right? Now in crypto, it’s typically spread, in stocks, it would be commissions. So, if the exchange can get you to trade larger and larger positions more and more frequently, then they’re gonna make a lot more money.

This sort of thing, this strategy, is absolutely nothing to do with you being profitable, with retail traders being profitable. It’s everything to do with the exchange trying to generate more volume so that they can make more money in the form of spreads or commissions. So, Martingale position sizing is the worst thing you can do.

The Alternative: Protecting Your Capital and Position Sizing:

And if you, uh, if you see an ad like this, it looks shiny, it looks wonderful – Ooh, there’s a new futures grid bot, and it allows you to do Martingale position sizing, and look! We’ll cover your liquidation and look you can achieve this much annual return. It’s amazing on a tiny little backtest. They just found some really positive results, and that’s what they use to market. What they don’t show you is if you position size like that long term.

There’s absolutely no way you’re going to survive to become a full-time, consistent, and profitable trader who’s built significant wealth from the markets. Because Martingale position sizing just won’t allow you to do that. You’re going to be way too volatile, and when that trade that’s got your name on it comes along, it’s going to take you out of the game and wipe you out.

Position sizing is the number one way to stay in the game and keep yourself successful. But the only way to do it is to position size so that your risk is controlled, contained. You don’t keep increasing your risk when a trade goes against you. Actually, the best way to do position sizing is the opposite of Martingale.

What you do is you add to winning trades as they move in your favor, and you close or cut losing trades as soon as they hit your stop. Or as soon as you get an exit signal. So you keep losing trades small and short in duration. You let winning trades run. And as your trades run, you can add to that position, pyramiding into a proven trade.

Why Martingale Position Sizing is Psychologically Appealing (Even though it is a terrible idea)

Not throwing more good money after bad in a losing trade, hoping to get a little bounce so you can get out even. Now, the reason Martingale is so psychologically appealing, Martingale position sizing, is that. It allows you to avoid admitting that you’re wrong. Because if a trade goes against you a little bit, you go, oh, that’s alright, I’ll just double down, I’ll buy more, because then when it bounces a little bit, I’ll get out at break even.

And then if it goes against you a little more, you buy even more, and then when it rallies a little bit, you get out at break even. And if it goes against you a little more, you buy more, and then it rallies, you get out at break even, if it rallies just a little bit. What you’re doing, in fact, is avoiding admitting that the first trade and the second trade and the third trade in this particular case was wrong.

You’re avoiding taking a loss because if you think about each of those pyramid and each of those Martingale trades that you’ve taken, each one of them is a losing trade. Just because you’ve bundled them together doesn’t change the fact that that first trade was a loss. You took the first trade up here, and then by the time the price dropped even further against you, you took the second trade here, and then the third trade down here.

That first trade is a massive loss, the second trade is a loss, and the third trade is probably going to be a loss too. But you keep adding to your position, deluding yourself. That this is actually all one big trade, just so that when it rallies a little bit and you get out, you can hope to be right.

Avoid taking a loss, because no one likes to take a loss, right? As humans, we don’t like to be wrong, we don’t like to take a loss. But as traders, we cannot afford to think like that. What you’ve got to do is disaggregate all of those individual trades and think about them individually. This is the key, and this will tell you why Martingale is such a stupid strategy.

Because what you’re doing is you’re buying, And you’re keeping a loss open, and you’re letting it run against you, so that loss is getting big. And then when it goes against you, the momentum is in the opposite direction, you’re buying more, and then you’re letting that loss run against you. And then when it goes even further against you, you buy more and let that loss run against you.

So now you’ve got three times the losing trade size running against you. Hoping for a teeny tiny little bounce so that you can get out and have the whole position appear to be maybe break-even or a little bit profitable. But when you disaggregate it, you see you’ve got several big losing trades and um, and one winning trade that kind of makes up for it.

It’s really not mathematically a very sound strategy because all it takes is one losing trade to get out of hand and it wipes out the whole thing. Also, you can’t keep doubling your position size forever. Just like in a casino, red and black. On Roulette, you choose red or black, and the casino guy spins the wheel, or spins the ball, and if you’re wrong, then you double your bet, and then the next time you, you spin the ball, if you’re wrong, you double your bet, the next time you spin the ball, you’re wrong, you double the bet.

Eventually, You can’t double the bet anymore, the casino caps out, you run out of money, whatever it is, and you’re in a massive deep hole. Trading with, uh, Martingale Position Sizing is exactly the same as that.

Conclusion:

So look, when I see something like this, it just really annoys me. Because it’s a bright, shiny object, it looks really clever, they’ve got some amazing marketing stats about how much money that you could make with this thing and oh, we’re going to cover your liquidation and all that does is get you addicted to stupid bloody trading behavior that’s going to wipe you out long term.

So be careful where you get your advice from. where you get your learning from, where you get your education from. In every case, you want to think about the incentives that the provider is giving you. One of the big problems with exchanges and brokers and so on is that they’ve got an incentive to make you trade more often because that’s how they make more money.

If you trade very infrequently, if you’re a long-term trend follower, The broker or the exchange is not going to make very much money out of you. But if you trade a high-frequency grid bot that has a Martingale position sizing strategy that keeps increasing your trade size as your position goes against you, the broker or the exchange is going to make a ton of money from your account and from your trading activity.

And we want to make money, we don’t want the exchange to make money at our expense. So, Martingale position sizing is the worst thing you can do.

Let me know if you’ve got any comments. Comment down below this post wherever you’re seeing it and share your experience. What dodgy behavior have you seen from the exchanges, from the brokers, claiming to want to help you, but really just trying to, uh, you know, take money out of your pocket by teaching you bad trading habits.

Stay safe, trade smart.

Bye for now.