The Successful Trader's Guide to Money Management

CHAPTER 1Martingale and Anti‐Martingale

1.1 The Right Stake

As mentioned in the introduction, money management (M.m) aims to establish the best stake to place when opening a trade or, in general, how much of your capital to use in the gamble you are about to embark on.

I think we all tend to adopt quite a simple statistical approach that encourages us to hope in a positive result after one or more negative results, and to fear repeating a success after placing a successful stake. In general, this is why you don't want to continue after a certain number of consecutive winning trades, while after a series of losing trades you'll be sure the next one will be a winner.

This tendency induces us to adopt a sort of risk management that, in general, leads us to increase the stakes after a negative period (betting on the fact that after various losses one should statistically expect a success) and reduce them after a positive period (for exactly the opposite reason).

In this chapter, we'll deal with this question by moving away from the trading environment, to enter a world we're all in any case familiar with: that of the coin toss.

Flipping a coin to see whether it lands heads or tails is a classic statistical example of 50% probability, and analyzing how we manage the stakes, on the basis of one event or another, can produce some surprising results.

This isn't trading, and the intention isn't to compare a trading system to betting. The purpose of this first part is simply to demonstrate ...