Before you deal with profit for trading, you should always define your risk before you start to trade. This is one of the most basic concepts for trading. Always deal with risk and profit for all your trade. However, for the martingale trading strategy, it is very common that there is no stop loss for each trade. Does it mean all martingale has no risk management? We will discuss risk management for Martingale Trading Strategy from a few perspectives in this article.
No risk management in Martingale’s strategy?
For normal trading, you can set a stop-loss price at a particular trade. Hence, the stop-loss is capital that you might lose in this trade, which is also the defined risk that you will bear for this trade. For the martingale strategy, there is no stop loss. Does it mean no stop loss = no risk management?
It is not true from our perspective. In our view, the martingale strategy consists of a series of martingale trades, and the stop loss or defined risk will have to be set at the account level instead of the individual trade level. For example, if your capital for your account is USD 2,000, this is the amount that you are willing to lose and your defined risk is USD 2,000. If you read our Key Success Factors for Martingale Strategy before and your backup plan is only top up an additional USD2,000 when your account is at a risky moment, then your defined risk is USD 4,000.
No matter what is the exact amount, the most important thing is to have a defined risk in the worst-case situation. As we stated in the previous article, there was a case in backtest that we observed you need to top up to USD80,000 for a USD2,000 account to survive. To be frank, when you see your account has equity or paper loss of negative USD79,000, you will wish your account hit margin call at USD2,000. Hence, it is extremely important to have defined risk and maximum capital (after top-up) that you are willing to risk in a worst-case situation.
Importance of having a separate idle account
In our Apprentice program, we recommend all our clients have a separate idle account that you use to keep all the profit there and you need to ensure there is no trading activity and really idle. That account is meant to keep your profit. You also can use the profit there to top up your account at a risky moment as long as you defined your maximum risk/amount. With this approach, you can quickly top up your account at risk when it is needed. For example, if your backup plan is to top up 100% of the amount when it is at risk, your trading account will have USD2,000 and your idle account should have USD2,000.( this is our backup plan. You can modify it to suit you based on your own circumstances).
Putting all profit in the trading account
With the backup plan/game plan above, you always keep USD 2,000 in your trading account and then keep USD 2,000 profit in your idle account. From a risk management perspective, your defined risk for the trading account is USD2,000 and if you top up your account, your maximum defined risk is USD4,000. All risks are defined and as long as you execute as per plan, the maximum risk will be defined and limited.
What about keeping the profit in the trading account? since the profit can support a higher margin and reduce your chance to hit margin call, why we need to move the profit to idle account ?
Putting all profit and capital in single account = undefined risk
Limitless Trading
The key reason we want you decide an capital amount for your trading account and the amount that you want to top up is to define risk for your account and maximum risk that you can afford to lose.
Let us give you a scenario. Assuming you put all profit in the trading account, you started with USD 2,000 as capital, and after few years, your capital and profit has grown to USD 8,000. One night while you are sleeping, some serious disaster or incident happen ( earthqurke or someone accidentally launch an nuclear missle). When you wake up, you saw your account is having paper loss of USD 7,000. What should you do now ?
Compared with having USD2,000 in trading account and USD 6,000 in an idle account, you would have wake up and saw your account hit an margin call with a total loss of USD 2,000. In this case, you still have your profit of USD 6,000 and give you ability to survive and restart the trading.
If we tweak the scenario a little bit, when you wake up , you saw your account is having paper loss of USD 1,500, you still have options to analyse the market and decide whether you still want top up as per your backup plan or you decide to let it hit the margin call. Compared all 3 scenario, you would rather be in the last two scenario than in the scenario of having paper loss of USD7,000 and do not know what should you do.
Most of the clients that keep profit in the same account, once they hit margin call and lose all the profit along these years, they most likely will not have the courage to start trading again unless they really realize this mistake that they have.
Keeping profit in separate idle account looks very simple until some people ignore it or forget abuot it. But the reason behind is very critical as it is the risk management for the trading strategy. It could be very expensive(potentially lose all the profit from years) if you hit this mistake.
Incremental Approach to increase exposure
What happen if I want to increase my exposure and capital to gain more profit ? We recommend to use incremental approach to increase exposuse ( applicable for Ophiuchus EA and Limitless EA only). For example, assume you started with USD 2,000, and your backup plan is to top up USD 2,000 from your idle account at risky moment. If you want to increase x amount (x can be USD 500 or USD 2,000 or more ), the safer approach is to ensure your idle account has that x amount too before you increase. If your idle account already has USD 2,500, then you can increase your capital amount to USD2,500 , increase the starting lot size, and then every month transfer out all profit and only keep USD2,500 in trading account.
With this approach, you always will have enough top up amount in idle account that can use to fund your trading account quickly.
Hope this article emphasize again the importance of risk management in trading! Happy Trading!