Testing the Labouchere Betting System with Monte Carlo Simulation
Summary
The article explains the Labouchere cancellation staking method, a progression in which losses are added to a number sequence and the next stake is based on its remaining endpoints. Wins cancel sequence entries, so a run of wins can recover earlier losses. It contrasts the progression with Martingale and describes how stake growth and drawdown depend on the sequence of outcomes.
The author proposes a configurable simulation to test whether this money management method can change a trading system’s mathematical expectation. The experiment uses random win/loss outcomes, adjustable win probability and initial risk, and repeated virtual deposits. The reported conclusion is that Labouchere cannot make a negative or neutral expectancy profitable; with positive expectancy, both it and fixed staking can profit, though their outcomes differ. The evidence is simulation-based, and results vary substantially across deposits, even when many are simulated. It assumes equal win and loss sizes and depends on adequate random sampling, so it does not establish performance for real markets with changing payoffs, costs, or execution constraints.
Key ideas
- Labouchere stakes rise after losses and are calculated from the first and last uncancelled sequence entries.
- Wins remove sequence entries, but recovery may require multiple wins after a drawdown.
- The article uses repeated random simulations to examine stake progression under different win probabilities and risk levels.
- The reported simulations do not show that Labouchere can turn a nonpositive-expectancy system profitable.
- Results across simulated deposits can remain widely dispersed, so risk and sample size matter.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.