Dealing with a losing position - The SP500 & Horses

12:54 AM

Now I have a position that is open, it is not very big but it is still part of what I believe is part of a bubble.

I have talked about the reasons at length and why I think it is a bubble(please see here) and since then have developed more evidence to support why it is a bubble and little evidence that it is not. For e.g. 8 presidents of the US has come after a two-term president. 7 of them experienced a recession in the year following their election, Donald Trump is number 8.

I know gurus such as Druckenmiller and Ichan are long in the market but yet others such as Soros are short.

But I am holding a short position in the SP500, and down quite badly, slightly over 1% of my account.

Recovery here would mean averaging down, but more than my initial holding amount. Essentially doubling down on a losing bet to hope it recovers. This specific strategy is called martingale, a term that shares a term with horse riding.


I have to caution, there are many people who use martingale mainly because they do not wish to be wrong, or to be seen as wrong, or do not like to sell losers(prospect theory) especially on eToro. This is super dangerous because when they lose big, they lose everything.

I find this kind of trading is irresponsible if it is blind.

If you are copying someone using this, be aware that it will be like a Turkey effect. Everything will be fine and dandy for 364 days a year, and that one Christmas day. Well...

But i do not mind employing it here because one of the marks of a good macro trader is to know when to call it quits and when to recognize it is an even better opportunity. For me, this is a better opportunity.

Using this is merely recovering some of the position, even if it turns against me, that is fine because i do not mind being down double this position.

Looking back at the SP500, each successive high was met with a retracement at least to the 38.2% mark. Using the martingale, i will try to recover the position in full and immediately reenter the trade so my exposure is still similar to what i initially bet on.

In math terms where "x" equal initial entry size

1x - - - > Enter additional Position, of 1x + 1.6x = 2.6x
Sell 2.6A when P&L = $0
Re-enter immediately with 1x

I can exit completely and move on, or i could re-enter at a later time, but i am doing this so i can constantly be exposed to the market and not lose out if my timing is off.

Can I just close 1.6A instead of closing everything, Yes i can, but i am doing this because transaction costs are minimal and exposure can be better managed this way. In other words, its easier for me to math.

If i were to enter current levels now it would look something like this:

Trade Size (total) Open Price Current
Level 1 8.80 2268.7600 2,311.1231 19,965.09
New Value 20,337.88
P&L -372.80
Level 2 14.08 2,337.6000 2,311.1231 32,913.41
New Value 32,540.61
P&L 372.80

While Breakeven is going to be somewhere around 2311 levels above the 38.2% fib retracement levels. i will not be upset if it trends higher following that.

For now, i have to wait for consolidation to make my entry, no telling how much more this rally will persist.

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