Jan

28

 The beauty of a Martingale strategy is that we have price distributions that are bound at zero.

We are in a casino, where red can only come up on the little wheel X times in a row.

And no one in this business can get past their pre-conceived notions to capitalize on that.

No one.

Instead, the entire industry wants to focus on price direction, the immediate direction of price, which has nothing to do with what's going on after the next play. Nothing at all.

anonymous writes:

Mr. Vince, would you mind expounding on this concept of for the dunderheads like me. I get that a price of a stock is bound at zero (I'm hoping I at least understood that comment correctly), and that red can only come up a finite number of times in a row as a result. How does this help with a Martingale strategy in the real world with a limited bankroll and uncertainty over how many times in a row the wheel actually does come up red?I am obviously not looking for a grail with these comments and realize they got beyond a simple Martingale, but would like to explore your concept further if you're gracious enough to share more food for thought.

R. Vince responds: 

It gets messy quickly now, so I will try to keep it at 38,000 ft. Beyond the next, immediate play, or trade, or holding period, where <<what one has to risk is a function of what has happened to what they have to risk up to that point>>, you are somewhere on a curved line (for 1 proposition. For N propositions, you are in an N + 1 dimensional manifold. So, for 1 proposition, you are in a 2D manifold - a plane. I bound the manifolds at 0 and 1 for all axes except altitude - which is the cumulative expected return. So you are on a surface in an N+1 dimensional manifold.

Everyone is in this manifold, on this surface when the caveat (inside <<…>> above) holds, which includes those practicing portfolio insurance, any type of portfolio re-balancing, replacing components in an index, any type of short or levered ETFs, any managed programs, etc.

And I contend, ultimately, the only thing that really matters in trading (over consecutive trades or holding periods) is where you are on this surface, and possibly, how you are moving about it. Again, the most sophisticated, thorough and ultimately practical (some might argue otherwise) would be the most recent paper with Lopez de Prado and Zhu.

The point is, where we are on that surface, and how we are moving about it, we are either oblivious to or are using to satisfy certain criteria. For example, one who wishes to maximize their MAR ratio would want to be at those points on the surface that are in the sub-manifold of what we all "zeta-points" on it. Another — If one wants to begin to maximize time at or near equity highs, they traverse a path between some loci on the surface and 0,0…0 going downwards with sinning periods, upwards with losing.

Without violating the proprietary ideas of other colleagues, we can look at randomness, and at this hypothetical bounded roulette game in terms of this surface and our criteria.

What to me, at this point in my life, is most interesting about this now is not so much the trading implications, but the more broader applications of this. As a trader, we seek growth, but there are many more functions in life that comport to this same growth dynamic where we seek to diminish growth, and I find applications for it everywhere I look.
 


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