Progressive or martingale systems

Hi everyone,

As you can imagine the internet is full of so called Magic Systems. Robots and Expert Advisers and auto traders or copy traders that you simply have to purchase the system for 500$, open an account with 1.000$ and then make 200$ up to 600$ every month.

Many of these are pure scams where you don’t see your money back after you make the transfer. Others are real programs that use basic mathematical formulas like progressions or martingale to execute trades and recover on retracements. These systems work for a few days, weeks or even maybe months. But do not be fooled, all progressive systems only postpone your losses. You will see big Drawdowns (open losses) and then eventually recover to make just a few profits while you sweat and panic. But you are only delaying your losses and many times fueled by greed you will invest even more hard earned money into this losing account, until the big day arrives and you check your account balance to see it at zero.
Unfortunately yesterday was such a day. One of the most proliferated Robots (basic program) with all the usual marketing, with “proof” of withdrawals and crazy profits did blow all accounts.

This is from start of 2017 until yesterday. Several accounts where open to follow as read-only (investor password) and after several attempts of several users trying to selling me this EA (Expert advisor/Robot/program) I have warned everyone who approached me regards this EA or any similar progressive EA and have been tracking these accounts and alerting about the huge risks of it. This particular one used a 1.55 progression. You can see who he placed trades with a progressive increase in size against the trend. This is the basic principle. Many argue that it just needs a huge balance, but still the risk is gigantic and the returns low, if you have a big balance.

Today the same accounts that where running on the FBS broker have no longer access to the full history and it is a big red flag to me. Cleaning all accounts past history.

Many will argue that they made their money back while withdrawing profits, but this is the same as a Ponzy Scheme. Many jump in early and take the bet because they can afford to loose the money and hope to recover it before it blows, but non the less the internet is full of free martingale EAs, they do not work on the long term and that is why they are free. But many still fall for this “scam” and buy a few lines of cheap code, expecting to get wealthy with no work and no skills or knowledge.

Our ultimate goal should be capital preservation and growth of wealth. Now other versions of this EA with a softer progression of 1.20 are still out there and free and they are called conservative and low risk, but still yesterday I saw one of those accounts dropping from 80k to 40k. It is still running but you can see the kind of risk involved even with softer progressions and when they get caught in a flash event or something alike it will be over and hurt even more.

The true and one only safe “strategy” out there is the strategy that most stock investors use. Dollar cost average investment with no progression and no leverage. These two words are the big difference between longterm growth and certain ruin. No progression and no leverage!

I am running backtests on all kind of EAs since 2012 and developing my own strategies and the most difficult part is managing the account and the exposure, having good entry signals with more winners then loosers with a low Drawdown. Executing trades is the easy part. Many of these EAs deliver a risk return below 2. Many times having big DrawDowns of 60% to end only with 20–30% returns. From an investors perspective only risk rewards above 2:1 with low risk of ruin make sense and to invest big cash many only start at a risk reward of 4:1. Why 4:1? not because they want to make 80% profit and risk 20%, but because they only want to risk 4% and still make a good return of 16%. Losing 4% of one million is 40k.

These last years, backtesting several strategies on different pairs on individual years from 2016 to 2009 I have very mixed results from positive years up to negative years. Check just at this small example of my database of backtests.

Results go from an average 20% return to 70% return on a yearly basis with just a few cases where the risk reward would really make any sense to invest real money. But it is hard to backtest a dynamic EA where you could feed him with a database of fundamental changes, like interest changes and monetary forward guidance or market sentiment, or events like Brexit and the Flash event. Backtesting helps to improve and tweak and use the good systems from one strategy combining them with other good systems from other strategies. The EAs sold for MT4 are mainly a static program. All dynamic and genetic EAs are something more like the so called algorithms and you wont get your hands on any of those, as they require a constant update.
All more complicated EAs should be monitored by his developer, the one who understands what it does and how he can tweak it to adjust with the fundamental changes of the market.

Tackling all the worse case scenarios and choosing all the best ingredients from all my research and study, filtering out everything that does only work sometimes, aiming safety and a reasonable risk reward here is my latest fully automated backtest starting with 10.000$ without any manual intervention since 2009 until 2017, including Brexit and its flash event in October.

The yearly average is about 14% for this 8 year backtest and a total return above 170%. The Flash of October caused some heavy drawdown but mainly on the generated profits. There are still ways to improve it as there are still strategies and money management techniques I use on manual trading that would not have made sense to try to code and implement on a system that does not break this 2:1 risk reward barrier on the worse case scenarios.

If we exclude Brexit and all the increasing volatility due to uncertainty afterwards, the same backtest with less conservative settings from 2009 until June 2016 has a much different outlook.

The yearly average is about 25% for this 7 and half year backtest and a total return above 320%.

A lot of work is still ahead, but mainly the backtests help with the manual trading, remembering that market conditions change and greed is our worse enemy. It helps to understand how a specific strategy behaves under certain market conditions. My goal is not to run any accounts fully automated, as I mentioned before, every EA needs close monitoring, needs to be disabled and activated when needed, needs to be tweaked according to the fundamentals and market conditions. Keep working harder and improving further to achieve your goals. My goals are not get quick rich, but low risk of ruin and slow and steady growth of wealth.

I wish you all an amazing week. If you have some spare time, check all my articles, scroll down and pick those that interest you.

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.