The End of the Lord ?

http://blog.thelordoftrading.com/2012/03/end-of-lord.html

Anonymous wrote:

The only difficulty I have with pyramading is that your theo average goes up, so the initial position will be sooner back in the red.(damn you mean reversion!) how do u handle that? or are u always all-in with 1-2K shots?

That's one of the main difficulties with pyramiding and anti-martingale more generally : you average your price up, but at the same time that's precisely what keeps the crowd away from this kind of trades and precisely why I believe it's the best way to make money from the markets, if not the only one. I'm sure you know plethora of guys doing the very opposite : averaging down, it's the "natural" stuff and very common. The chaps purchase more and more as the price drops and the thing is most of the time, there's a mean reversion as you say, the price comes back and the guys finally breakeven -generally they cut their position at breakeven, traders tend to forget that the name of the game is to make money, not to recover from previous losses...-. Now I'm sure you also know that one day, one bloody day, the price will not revert quickly enough and these chaps will go broke, it's a quasi certainty. You and me are on the opposite side, we accept to take frequent and small losses knowing with a quasi certainty that one day we will make the huge profit that will more than offset them -but once again, beware of the breakeven, it's even more tempting when you use anti-martingale to cut there-.

OK, what I just wrote above is a bit theoritical, now more practically,

- I believe to be profitable while pyramiding (anti-martingale), you need balls, a blind faith in your trading system, particularly if you believe your trading system has a positive expectancy, and a lot of patience. To be honest, I personally don't have much balls and I'm a very risk averse kind of guy, but firstly I'm continuously working on myself to improve this (that's part of my "Absolute Trader" stuff, I know may sound like non-sense) and secondly thanks to an anti-martingale I can start with tiny stakes (1k) while I can still aim to make millions (1 million is "just" 10 doublings of 1k, 2^10=1024x). That makes me virtually "broke free" (I assume I will always be able to build a 1k stake) and potentially a millionaire, which helps!

- What also really helps when pyramiding is to have one way or the other some kind of trailing stop system in place. For instance, trading "Extreme Pyramids" http://blog.thelordoftrading.com/2011/02/inglorious-brokering-bastards.html, everytime I pyramid, the new margin requirement defines implicitely a higher stop loss level, locking part of the gains (or reducing the loss). Roughly, in my anti-martingale system, after every trade I either double my account or lose 75% percent of it. As soon as a loss occurs, I generally cash out the 25% remaining in the account and restart with 1k. This 25% recovery acts as a trailing stop.

- Last but not least, once you managed to withdraw a significant amount from trading, you have "hedged" several of trades. I mean you can screw a few of them, you'll still be globally profitable. Hopefully, the day will come that you'll make enough to be profitable whatever happens and to me, this situation can occur only with an anti-martingale.

Now, from my own personal experience, I don't think that's the main problem with anti-martingales. Let me tell you where the main difficulty lies: it's to let the profits run and keep on pyramiding until you kill the game. That's what makes Livermore or Soros legendary game killers: their balls to keep on building their pyramids on winners. Once again a practical example : let's assume again a system where you double or lose 75% of your account at each deal. If you manage to have a 5-winning streak, 5 bloody winners in a row, your initial 1k would have turned in 32k (1000*2^5). With a 25% recovery, you've locked 8k, if you screw the next trade, it's 7k net profit that would go straight in your pocket, not bad considering that it cost you 1k initially. But damn, what if you withdrew now the 32k from your account? 32k tax free (thanks to the spreadbetting in the UK!) is like 64k of income in the Orc Race. That's in average one year of salary for a city worker, it's years of rent, years of kid's school,... I can tell you, in such a situation you're very tempted to take the 32k. Even if you resist the temptation, it becomes even harder when it comes to 64k if you manage to have one more winner, 128k or 256k. Can you imagine what you can buy if you withdrew right now 100k made in just a few weeks after a few trades after you listened to your old friend Sauros? See what I mean ? That may be a "good" problem but it's still the main problem with an anti-martingale system. And at that stage, I haven't found a solution yet. I happened to have fairly good winning streaks and I kept on telling myself that withdrawing the amount in the account wouldn't change my life -1 million may change my life but not 128k or even 256k (well... I've not arrived that far yet to be honest)- but I have to confess that everytime came a point where I chickened out and withdrew the pot... I'm still working on this and I'll let you know if I improve.