Martingale theory part 1

Martingale Strategy

Martingale theory part 2

Martingale Strategy

MARTINGALE THEORY

Would you be interested in a trading system that is practically 100% profitable?
Developed in the 18th century, this approach is centred on probability theory and if you have sufficient funds, it has an almost 100% success rate.
Known as the Martingale, this strategy was mainly used in Las Vegas gambling halls.
It is also the main reason why casinos now have gaming minimums and maximums, and why the roulette wheel has two green markers (0 and 00), as well as odd or even bets.
The problem with this tactic is that in order to attain 100% effectiveness, you must have a lot of cash.
As this principle is based on mean reversion, one wrong trade can bankrupt an account.
Also, the amount of money risked on the transaction is much greater than the likely gain.
In spite of these drawbacks, there are ways to improve the Martingale approach.
We are going to look at how you can improve your likelihood of making money using this very high risk and complicated strategy.

But first, what is the Martingale Strategy?

Popular in the 18th century, the Martingale strategy was introduced by a French scientist by the name of Paul Pierre Levy.
The Martingale was initially a type of gaming trend that was founded on the premise of “doubling down.”
A lot of the background work on the Martingale was done by an American mathematician called Joseph Leo Doob, who wanted to disclaim the probability of a 100% profitable gaming strategy.
The mechanism of the model obviously entails a starting bet, however, every time the bet loses, the stake is doubled in a way that, given adequate time, one win will make up all of the previous failures.
The introduction of the 0 and 00 on the roulette table was intended to break the mechanism of the Martingale, by granting the game with more than two potential outcomes besides the odd versus even, or red versus black.
This effectively killed off the long-run gains the Martingale could realise destroying any motivation for using it.
Let’s look at a basic example to help grasp the basis of the Martingale strategy.
Suppose we took a $1 coin and played heads or tails, there is a 50:50 chance that the coin will fall on either heads or tails.
As each individual toss is independent, the preceding toss has no effect on the next one.
So if you always bet on heads, in the end you would, given an unlimited sum of money, at some point land on heads.
The technique is based on the concept that just the one successful transaction is needed to turn your account around.
As an example, let’s pretend that you have $10 to gamble. You start off with your first gamble of $1.
You bet on heads, heads comes up and you win $1. You now have $11.
You then carry on betting $1 until you don’t win.
But if the following toss doesn’t win, your ‘account’ moves back to $10.
On the following bet, you stake $2 hoping the coin lands on heads; if so, you would recover your earlier losses.

WOLFE WAVE - WHAT IS THE WOLFE WAVE?

Waves are patterns in markets that occur over and over.  They’re rhythms that you’ll see again and again when you’re looking at a market chart.  By using these waves, you can discern an overall pattern to a market and make decisions about when to trade.  One of these waves is known as a Wolfe Wave.

WHO FOUND THE WOLFE WAVE?

The Wolfe Wave was discovered by a trader named Bill Wolfe and introduced to the public in a 1995 book called Street Smarts by another trader, Linda Bradford Raschke.  Wolfe’s idea was that waves financial markets act the same way that waves in the ocean do, and that you can use them to predict where a price is going to hit at a specific time in the future when you recognize the wave.

HOW DO YOU FIND THESE WAVES?

Wolfe Waves have a very specific pattern that can be identified.  Once you see this pattern, you can use them to predict, based on where prices have been, where they’re going to end up when they fall into this Wolfe Wave rhythm.

IDENTIFYING WOLFE WAVES

Let’s talk about the bullish Wolfe Wave.  This will tell you how it works, and you can simply reverse it for the bearish Wolfe Wave.  Imagine a zig-zag on your chart made of five lines.  The first two lines, from down to up to down, look like a triangle without a bottom on your chart.  For a Wolfe Wave, the bottom point on that third line has to be below the bottom point of the line you started with.  Now you can draw an imaginary line between the starting point and the bottom point of that second line, which should be angled downward.  Now the third line in the zig-zag, that goes back up, won’t go as high as the first line went in a Wolfe Wave.  You can now draw a second imaginary line between the top point of your first line and the top point of your third line, giving you an upside-down triangle.  Now continue drawing those two imaginary lines until they meet each other.  This point, where the trends converge, is known as the ETA or estimated time of arrival for your price.  You can now draw a third imaginary line, from your starting point to the top of your third line, and then continue that line along until it ends directly above your ETA point.  That point up there is known as the EPA, or estimated price at arrival.  The fourth line in the zig-zag should actually end at or just below your bottom trend line - the first imaginary line you drew.  That’s your entry point, because it’s where the wave is at the lowest, and right before it’s about to head to its highest point.  If you’ve properly identified the Wolfe Wave, you should now see the price rise until it reaches the EPA at the ETA. 

HOW IS THE WOLFE WAVE USEFUL

Any trader will tell you that there’s no magic bullet - these things aren’t set in stone.  But it’s an extremely useful tool for getting an idea of where a price is going to go based on where it’s been.  If you spot a Wolfe Wave forming, and you time it properly, you can enter and exit at optimal times to make a profit.  The key is learning to identify the waves quickly - charts move fast, you really have to be on the ball to spot these trends accurately as they occur with enough time to get in on them. 

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