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Martingale strategies

Hodling and cost averaging down have become fashionable tools over the last few years, and yet we still object to these high-risk methods of market play.

Why do these methods of market participation find such favor in the investment world?

Three subjects come to mind to answer this question:

they are intuitive

they are easy to use

and they make you feel good

We by no means state market participation is ever easy, but we criticize this approach as a general method for its high-risk factor.

Their popularity suits an investor with an ego that can't tolerate failure.

In a counterintuitive world of trading, the set of rules makes market participation easy.

You can always buy (and are never wrong)

You never have to sell(and are never wrong)

You do not need a strategy of when to get it or when to get out, and you can always buy more.

As alluring as these rules sound, they do not have a sound structure for consistently extracting profits from the market.

What this sort of market play quietly assumes is higher prices in the future. While we had extended phases in the past of extended bull runs, we equally had long market phases of sideways markets and down markets.

What is also assumed is that the participant has a psychology of steal, can sit through severe drawdowns for extended periods, and has a mere unlimited tolerance for risk.

So while you are guaranteed participation with ease and comfort, once in the position, the happy life is over.


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