Probability 101, the intuition behind martingales and solving problems with them

Re:Probability 101, the intuition behind martingales and sol... by chasebank on Thursday February 23, 2023 @05:14PM (#34917363)

Let's say I'm applying martingale on an index like SPY or QQQ, which I plan to hold otherwise in a tax free retirement account. If I run out of cash to double down, I'm in the same position as I would be otherwise, except I've averaged down my entry price. When the index eventually comes back up, you profit, and resume martingale. How could this be a losing strategy on an asset you plan to hold otherwise?

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Re:Probability 101, the intuition behind martingales and sol... by pilarphosol on Thursday February 23, 2023 @06:27PM (#34918308)

I’d look into the Kelly criterion to get more color on this.

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Re:Probability 101, the intuition behind martingales and sol... by lordnacho on Thursday February 23, 2023 @06:57PM (#34918634)

Plug the numbers into the Kelly criterion.

The fraction of your wealth you should bet when the coin is fair and you get paid evens is zero.

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Re:Probability 101, the intuition behind martingales and sol... by chasebank on Thursday February 23, 2023 @07:45PM (#34919089)

Kelly criterion is applicable to betting / trading, where you're winning / losing. If you never 'lose', ie., stay in the market, martingale seems really promising. For instance, SPY will never go to 0. The FED / US govt will never let it. In fact, it can't - it would destroy the US economy. So when you're playing a game where you know the graph will always to up and to the right, eventually, martingale seems appropriate.

FWIW, I trade futures on the side and have always been interested in DCA or martingale long strategies.

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Re:Probability 101, the intuition behind martingales and sol... by mempko on Thursday February 23, 2023 @08:42PM (#34919590)

And yet in the history of the world, countries and economies get destroyed all the time.

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Re:Probability 101, the intuition behind martingales and sol... by chasebank on Friday February 24, 2023 @01:49PM (#34928271)

True. But if the US equities market fails, there will be more to worry about than your stock portfolio.

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Re:Probability 101, the intuition behind martingales and sol... by throwaway81523 on Thursday February 23, 2023 @09:31PM (#34920007)

This has nothing to do with martingales as a term used in gambling. A martingales in probability theory is just a type of stochastic process with certain mathematical characteristics, and this article is about using them on certain types of math problems where their usefulness is not otherwise obvious.

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