ANTIMARTINGALE MONEY MANAGEMENT

The obvious definition of an antimartingale money managementmethod is exactly the opposite of the martingale methods. As an accountincreases, the amount at risk placed on future trades also increases.The main characteristics of antimartingale methods arethat it causes geometric growth during positive runs and suffersfrom what is called asymmetrical leverage during drawdowns. Asymmetricalleverage simply states that as an account suffers losses, theability to make up those losses decreases. If a 20 percent drawdownis suffered, a 25 percent gain is required to get back to even. A 10percent drawdown requires an 11.11 percent gain to get back to even.The formula for this is:[l/(1 - % loss)] - 1 = Required % gainIn many cases, asymmetrical leverage does not affect trading.For example, if a trader trading the absolute minimum available inthe bond market (which would be a single contract of the bondstraded in Mid-American Exchange) suffered a 20 percent drawdown,the required gain would still be 25 percent of the new account balance,but the ability to achieve the extra 5 percent has not diminished.This occurs because even though the percentage required torecoup the percentage loss of the account increases, the amount ofcapital to recoup the amount of capital lost remains the same. Therefore,asymmetrical leverage does not play a role in the performance ofthe account.On the other hand, it plays a huge role when traders apply certainmoney management techniques. For example, if a trader decidesto trade one contract for every $10,000 in the account, then asingle contract would be traded from $10,000 through $19,999. At$20,000, contracts would increase from one to two. Suppose that thevery first trade after increasing to two contracts is a loser for$1,000. Since there were two contracts on this trade, the actual losscomes to $2,000 and the account goes to $18,000. According to themoney management rules, a single contract has to be traded onceagain. The trader must now incur two, $1,000 winning trades to getthe account back to where it was just prior to suffering a $1,000 losswith two contracts. Here, the amount of capital required to bringthe account back to even remains the same, but the ability toachieve that amount has decreased by 50 percent. That is asymmetricalleverage and it can be detrimental. Later in this book, I presentsome ways to avoid it or at least diminish its effects in thepractical realm of trading.The positive aspect of the antimartingale money managementmethod is that it places the account in a position to growgeometrically.22 TYPES OF MONEY MANAGEMENT COST AVERAGING 23When I started my research into the money management arena,only one type of money management was generally accepted in theindustry. That method is called Fixed Fractional trading. Fixed Fractionaltrading is an antimartingale money management method. It isthe same type of method used in the coin flip example in Chapter 2.Fixed Fractional money management simply states that on any giventrade, x% of the account is going to be allocated, or at risk. The coinflip example allocated lo%, 25%, 40%, or 51% of the account on everyflip of the coin. Chapter 5 in this book provides a detailed explanationof the Fixed Fractional method so I am not going into detail withit at this point. You should note, however, that the Fixed Fractionalmethod takes on many different names. Regardless of their names orhow the methods are explained, the following are all Fixed Fractionalmoney management methods:l Trading one contract for every x dollars in the account. I usedthis example earlier when describing asymmetrical leverage (1contract for every $10,000 in the account).l Optimal fi This is a formula made popular by Ralph Vince.The “f” stands for fraction. It is the optimal fixed fraction totrade on any given scenario. The coin flip example yielded$36,100 by risking 25 percent of the account on each flip. Thispercentage represents the Optimal f of that particular situation.No other percentage will yield more than the $36,100 inthat example. However, Optimal f for one set of trades is notnecessarily Optimal f for another.l Secure fi This is just a “safer” mode of the Optimal f and willbe touched on in Chapter 5.l Risking 2 percent-3 percent on every trade. This money managementpractice is common among trading advisers and fundmanagers.After doing extensive research on the Fixed Fractional method, Iwas not satisfied with its characteristics. Therefore, I developed somethingcalled the Fixed RatioTM money management method, which hasnothing in common with any type of Fixed Fractional method exceptthat all these methods are types of antimartingale money management.These are the basic methods from which most other specificmoney management ideas are derived. The martingale methodsare not discussed here in any more detail since they are neverrecommended in this book. However, this book provides detailed informationon all antimartingale types of money management mentionedearlier.