What is the 'Anti-Martingale System'

The anti-Martingale system is a trading method that involves halving a bet each time there is a trade loss, and doubling it each time there is a gain. This system is the opposite, obviously, of the Martingale system, whereby a trader (or gambler) doubles down on a losing bet and halves a winning bet. Both systems are known as trading strategies in the foreign currency markets but can be applied elsewhere.

BREAKING DOWN 'Anti-Martingale System'

The assumption of the anti-Martingale system is that a trader can capitalize on a winning streak by doubling his position. In contrast, a Martingale strategy requires the trader to double his bet each time he loses, and hope to eventually recover those losses and make a profit with a favorable bet. The anti-Martingale system accepts greater risks during periods of expansive growth and is considered a better system for traders because it is less risky to increase trade size during a winning streak than during a losing streak. This type of thinking may fall into the "hot hand fallacy" trap, but when markets are trending up, the anti-Martingale system could be successful for a trader, who may pick off a series of positive trades before a loss interrupts his streak. However, a doubling down on a given winning bet exposes him to a single large loss that may wipe out previous gains.

On the other side — cutting a losing bet in half — a trader is in effect practicing a stop-loss discipline that is generally recommended in trading. The anti-Martingale system is somewhat of a play on the Wall Street maxim of "letting your winners run and cutting your losers early." It may serve well during momentum-driven markets, but markets can turn quickly against traders. The Martingale system, on the other hand, is more of a "reversion to the mean" scheme that may be more suitable in directionless, meandering markets.

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