Happy ANZAC long weekend to everyone, especially diggers past, present and future.
I love a beer and a game of 2up on ANZAC day with my mates. It got me thinking; what is the best or most appropriate strategy to apply to a situation where you are guaranteed to be correct 50% of the time? That is, what money management strategy could one use to gain a positive expectancy?
Please don't anyone think I am trying to get rich from a game of 2up, but I'm sure the same strategies could be applied to any investing/trading system that encompasses being 'right' 50% of the time.
I am also well aware that this could not be applied to casino games as the casino obviously have their 'edge' e.g. 0 in roulette etc.
My first thought was to use a fixed fractional position sizing. So I did some playing around with Excel. I used random numbers and kept track of my Max drawdown and equity highs over a thousand or so coin tosses. I experimented with position sizing from 1% to 10%. Failure. Even if only risking a set % of your capital, you will eventually go bust. I began thinking and I relaised that this is because you are risking 1R and the most you can win on a single toss is 1R. So therefore, no opportunity to let your profit run.
So then I began thinking about capturing a 'trend' of heads or tails. We all know they happen. Trends of 5 o more heads or tails.
So I am now thinking about a system that would identify a trend, take advantage of it for as long as possible and not lose everything when the trend changes.
So it would need to be based on an ANTI-Martingale as we want to increase R as we get on a trend. That is, we don't want to double our bets if we lose, as a $10 bet very quickly turns into a $320 bet!
If we simply double R on each win, this is fine, but when we eventually lose, we will lose all built up profits and our initial R.
So; What strategies would one suggest so that you can capture a trend but take profits along the way so that when the trend changes, you still show some profit?