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VIDEO NOTES

A lesson on the two different categories that position sizing strategies fall into when used in the forex, futures, and stock market.

In our last lesson we looked at how most traders pick a standard amount to trade per certain amount of equity in their account and how this probably isn't the best way to maximize profits and minimize losses of a potential strategy. In today's lesson we are going to look at the two categories that most position sizing strategies fall into which are known as martingale strategies and anti martingale strategies.

A position sizing strategy which incorporates the martingale technique is basically any strategy which increases the trade size as a trade moves against the trader or after a losing trade. On the flip side a position sizing strategy which incorporates the anti martingale technique is basically any strategy which increases the trade size as the trade moves in the traders favor or after a winning trade.

The most basic martingale strategy is one in which the trader trades a set position size at the beginning of his trading strategy and then double's the size of his trades after each unprofitable trade, returning back to the original position size only after a profitable trade. Using this strategy no matter how large the string of losing trades a trader faces, on the next winning trade they will make up all their losses plus a profit equal to the profit on their original trade size.

As an example lets say that a trader is using a strategy on the full size EUR/USD Forex contract that takes profits and losses both at the 200 point level (I like using the EUR/USD Forex contract because it has a fixed point value of $1 per contract for mini forex contracts and $10 per contract for full sized contracts but the example is the same for any instrument)

The trader starts with $100,000 in his account and decides that his starting position size will be 3 contracts (300,000) and that he will use the basic martingale strategy to place his trades. Using the below 10 trades here is how it would work:

example

As you can see from the above example although the trader was down significantly going into the 10th trade, as the 10th trade was profitable he made up all the his losses plus a brought the account profitable by the equity high of the account plus original profit target of $6000.

At first glance the above method can seem very sound and people often point to their perception that the chances of having a winning trade increase after a string of loosing trades. Mathematically however the large majority of strategies work like flipping a coin, in that the chances of having a profitable trade on the next trade is completely independent of how many profitable or unprofitable trades one has leading up to that trade. As when flipping a coin no matter how many times you flip heads the chances of flipping tails on the next flip of the coin are still 50/50.

The second problem with this method is that it requires an unlimited amount of money to ensure success. Looking at our trade example again but replacing the last trade with another loosing trade instead of a winner, you can see that the trader is now in a position where, at the normal $1000 per contract margin level required, he does not have enough money in his account to put up the necessary margin which is required to initiate the next 48 contract position.

Example

So while the pure martingale strategy and variations of it can produce successful results for extended periods of time, as I hope the above shows, odds are that it will eventually end up in blowing ones account completely.

With this in mind the large majority of successful traders that I have seen follow anti martingale strategies which increase size when trades are profitable, never when unprofitable, and these are the methods which I will be covering starting in tomorrow's lesson.

1. Intro to Technical Analysis
2. Introduction to Dow Theory
3. Second 3 Tenets of Dow Theory
4. How to Read Stock Charts
5. How to Trade Support and Resistance
6. Multi Time Frame Analysis
7. Introduction to the Double Top and Double Bottom Charting Pattern
8. How to Trade Double Tops Like a Pro
9. How to Trade the Head and Shoulders Pattern Part 1
10. How to Trade the Head and Shoulders Pattern Part 2
11. How to Trade the Wedge Chart Pattern Like a Pro Part 1
12. How to Trade the Wedge Chart Pattern Like a Pro Part 2
13. How to Trade the Flag/Pennant Patterns Like a Pro Part 1
14. How to Trade the Flag/Pennant Patterns Like a Pro Part 2
15. How to Trade Triangle Chart Patterns Like a Pro Part 1
16. How to Trade Triangle Chart Patterns Like a Pro Part 2
17. Learn to Trade with Technical Indicators
18. How to Trade Moving Averages Like a Pro (Part 1)
19. How toTrade Moving Averages Like a Pro (Part 2)
20. How to Trade the MACD Indicator Like a Pro (Part 1)
21. MACD Indicator: Trade it Like a Pro (Part 2)
22. How to Trade the Relative Strength Index (RSI) Like a Pro
23. How to Trade Stochastics Like the Pro's Do
24. The Difference Between the Fast, Slow and Full Stochastic
25. How to Trade Bollinger Bands - Stocks, Futures, Forex
26. How to Trade the Average Directional Index (ADX)
27. How to Trade the Parabolic SAR
28. How to Trade Candlestick Chart Formations Part 1
29. How to Trade Spinning Tops and Doji Candlestick Patterns
30. How to Trade the Bullish/Bearish Engulfing Candlesticks
31. How to Trade the Hammer Hanging Man Candlesticks
32. How to Trade the Morning/Evening Star Candlestick Pattern
33. How to Trade the Inverted Hammer/Shooting Star Patterns
34. Why Most Traders Lose Money and The Solution
35. Why Traders Hold On to Losing Positions
36. Two Trading Mistakes Which Will Destroy Your Account
37. Herd Mentality is the Psychology That Leads to Big Trading Losses
38. Profit Expectations: What Millionaire Traders Know
39. How to Join the Minority of Traders Who Are Successful
40. How To Determine Where to Put Your Initial Stop Loss Order
41. How to Use the Average True Range (ATR) To Set Stops
42. How to Up Your Chances for Profit When Setting Stops
43. How to Reduce the Chances of Being Stopped Out on a Trade
44. How Successful Traders Use Indicators to Place Stops
45. Stop Your Mind From Causing You to Take Profits Too Soon
46. How To Use Trailing Stops
47. Why Position Sizing is So Important in Trading
48. Why Fixed Position Sizing Is Not the Best Way to Trade
49. Trading The Martingale and Anti Martingale Strategies
50. How to Set Trade Position Size for Maximum Profits
51. Maximize Trading Profits with Correct Position Sizing 2
52. Fundamental Analysis and The US Economy
53. A Simple Explanation of the US Economy for Traders
54. Simple Explanation of The US Economy For Traders Part 2
55. The Business Cycle and Fiscal Policy - What Traders Know
56. How Interest Rates Move Markets
57. What Traders Know About Interest Rates Part 2
58. What Traders Need to Know About The Structure of The Fed
59. How the Fed Changes Interest Rates
60. How to Determine When the Fed is Going to Change Rates
61. Why Markets Move Ahead of Interest Rate Announcements
62. How to Trade the GDP Number (Part 1)
63. The Components of the Gross Domestic Product (GDP)
64. Intro to Trading Non Farm Payrolls (NFP's)
65. Trading the News - Economic Numbers - Retail Sales
66. Trading the News - Economic Numbers - ISM Manufacturing
67. The Producer Price Index (PPI)
68. The Consumer Price Index (CPI)
69. Trade the News - Existing Home Sales Index
70. How To Interpret the Consumer Confidence Index (CCI)
71. How to Interpret the Index of Leading Economic Indicators
72. The Advantages and Disadvantages of Day Trading
73. The Advantages and Disadvantages of Swing Trading
74. The Advantages and Disadvantages of Position Trading
75. How to Keep a Trading Journal
76. The Most Important Attributes of a Good Trading Journal
77. The 20 Components of a Successful Trading Plan

This is a series of 77 short video lessons meant to give traders an introduction to the basics of trading as well as the components necessary to develop a profitable trading plan.