Martingale and Anti-Martingale Position Sizing in Trading
Summary
The document explains the martingale idea through conditional expectation and a fair coin game, then applies it to trade sizing. A martingale trading approach increases exposure after losses, often by doubling position size, in the hope that a later gain will recover prior losses. The anti-martingale approach does the reverse: it increases size after gains and reduces it after losses, aiming to participate more during winning runs while limiting exposure during losing ones.
An illustrative example uses Apple adjusted closing prices from July to December 2019, with assumed 2% gains and losses relative to the prior close. The article reports that the martingale position grows exponentially and may exhaust available capital; it characterizes anti-martingale outcomes as lower in variance in that example. These results are not a general performance guarantee: the illustration is brief, depends on its return assumptions and price sample, and does not establish profitability after trading costs or across other markets. Martingale sizing can lead to ruin or an unmanageable drawdown when losses continue.
Key ideas
- A martingale process has an expected next value equal to its current value given the available information.
- Martingale sizing increases exposure after losses, commonly by doubling the position.
- Repeated losses make martingale position requirements grow rapidly and can exhaust capital.
- Anti-martingale sizing adds exposure after gains and cuts it after losses, aligning more with momentum.
- The Apple example is illustrative and does not establish that either sizing rule will be profitable generally.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.