The Tall Tale of Martingale (Part 3)

Here’s a brief review of what I have discussed with regard to Martingale betting systems.

Although rare, extreme losing streaks most definitely occur. Martingale betting therefore favors shorter playing times because the longer I play, the more likely I am to encounter an extreme losing streak.

Martingale betting systems involve doubling my bet every time I lose. A long losing streak could easily have me down over $10,000 from a $5 initial bet.

Most people could never tolerate facing a loss that is orders of magnitude larger than the potential gain. If this has never happened to you then consider it extensively before attempting a trading system that carries a large potential drawdown.

I’ll go one step further…

If this has never happened to you then I strongly suggest assuming you would not be able to tolerate it either! Find another trading system or position size the system very small to prevent a heavy drawdown from significantly denting your total net worth. The alternative is learning something about yourself at the worst possible time: when you exit a trading system only to realize a catastrophic loss of capital.

Unfortunately, this has happened to me.

Would you ever stand being down over ten grand with the hopes of ending up five bucks? Most traders and investors cannot sleep at night or deal with the anguish of losing so much money when they stand to make so little even though they are one win away from vaporizing the entire loss.

Does that make us weak? Yes but no: with every additional loss, the huge loss I face doubles again! Maybe getting out with a few bucks to my name is better than losing absolutely everything.

In my next post I will describe a couple other ways casinos stack the deck against Martingale betting systems.