The average price is easier to explain with an example. Suppose you buy 1 kg of tomatoes for 100 r., 2 kg of tomatoes for 70 r., 4 kg of tomatoes for 40 r. As a result, you have a certain amount of tomatoes and a certain amount of money was spent on them. The average price is how much on average 1 kg of tomatoes cost you.
It is calculated like this:
Spent: 1×100 + 2×70 + 4 x40 = 400 p. (the amount we generally spent on tomatoes)
1kg + 2 kg + 4 kg = 7 kg (number of tomatoes)
400/7 = 57.4 p. (average price of each kilogram of tomatoes)
Thus, our costs would be similar to if we bought all 7 kg at a price of 57.4 rubles per each.
Let’s calculate why this is so: when buying, we spent 400 r. and purchased a total of 7 kg (average price – 57.4 rubles per 1 kg).
In the event that the price reaches 55 p., Then our 7 kg will cost:
55×7 = 385 p. Therefore, if we sell all tomatoes at a price of 55 r per 1 kg (below the average purchase price), we will be at a loss.
If the price reaches at least 58 p. for 1 kg (slightly above the average price), then our 7 kg will cost:
58×7 = 406 p. Therefore, if we sell all the tomatoes at a price that is even slightly above the average, then we will already make a profit:
406 p. – 400 p. = 6 rubles.
And if the price generally rolls up to 65 p for 1 kg (as in the picture), then our 7 kg of tomatoes will cost 65 x 7 = 455 p. And the profit will be 55 rubles. I give this example on purpose so that it would be easier for you to reveal greed in yourself 🙂 If, with a difference between profits of 6 p. and 55 p. something in the body fluttered, this is it. Just keep that in mind and don’t let her powder your brains.
In fact, the Martingale system adviser does not require significant departure beyond the average price – closing with a profit, as a rule, occurs almost immediately. Because the purpose of the adviser is the regularity of profit and not its maximization.
An important point: the purpose of the Martingale adviser is to regularly close profitable transactions, rather than maximize profits.
Thus, returning to Forex, our goal is that even the smallest possible rollback as often as possible “block” this very average price of the positions we have opened. This will allow them to close profitably. How to achieve this? Let’s reason.
To be coarser, the average price of all the deals we have opened, as a rule, is slightly closer than the price of the penultimate order. You can again pay attention to the figure above the last order we opened is the purchase of 4 kg at a price of 40 r. Accordingly, the penultimate one is the purchase of 2 kg at a price of 70 r. And, as you can see, the average price is close to 70 p.
Therefore, for simplicity of calculations, let’s just accept this condition: for profit, we need the price to go above the price of the penultimate order.
We opened the penultimate order at a price of 50, and the last at 30 – we are waiting for a price above 50.
We opened the penultimate order at 1.2222 and the last at 1.2220 – we are waiting for the price above 1.2222.
Such a scheme is valid when we have the same price step, i.e. when Martingale orders are opened by us at an equal interval. For example, every 10, 20, 150, 1873 points
Returning to our example (not with tomatoes, but with the foreign exchange market) Previously, we revealed that our minimum rollback is 40 p. Thus, 40 p is the maximum possible price step for us on this currency pair. If we take a step in the price more, then with a minimum rollback (in that same 40p) the price simply will not reach the price of the penultimate order, and we will not close in profit.
Further. You need to understand that the rollback in the forex market is an unpredictable thing and does not suspect our existence. If we take all 40 points as a “price step”, complexity can arise in this case:
Those. if from the moment of opening the last order, the price goes down 39 points further, then the next order will not open (we open every 40 p). And if going down by 39 points, the price then rolls back up by 40 points, then we will not get any profit. Because formally it will simply rise above the price of opening the last order by 1 p. Moreover, from this moment it is likely that there is another non-rollback movement in the direction that is “unnecessary” to us, and the chance to exit with a profit has already been missed.
So, to avoid such a scenario, we take and divide the minimum rollback by 2 and get 40/2 = 20 points. This will be our “price step” if the minimum rollback is 40 p.
In this case, in a similar scenario, the price may go below the last open order by only 19 points. And if from this moment the rollback begins, then 40 points will be enough to close all our positions in profit.
However, we forgot to take into account the spread, because in the forex market it is present in the same way as in currency exchangers.
Therefore, we take our “minimum rollback” equal to 40 points and minus the spread from it, which we take equal to 4p (again, I take it with a margin, since it is much lower on popular currency pairs in liquid times) 40 – 4 = 36 Here we get a “pure” price movement, i.e. how much we can earn as much as possible if we enter at the very beginning and exit at the very end.
Now, in order to avoid the above incident, we need to take half of this value as a price step, i.e. 36/2 = 18. This will be the actual price step for us, after the passage of which a new order will be opened with an increased volume “against price movement”.
A “pure” price movement is a movement minus the spread. Those. this is the maximum value that we can count on if we enter at its very beginning and exit at its very end.
4) It is time to calculate what kind of deposit we need for this whole thing.
The maximum size of the recoilless movement was, as we recall, 180 p
A trader opens a deal against a price movement every 18 p. Thus, in the worst case (which is what we base our calculations on), we need to complete 120/18 = 7 transactions before a potential pullback begins. Why 7? Because we are again considering the worst-case scenario when we make the first deal right before the price moves against us. And after that, it leaves for 120 points, where every 18 p we manage to open 6 more deals.
If we start buying with the smallest volume, then the lots of our transactions will be as follows:
1 transaction – lot 0.01
2 transaction – lot 0.02
3 transaction – lot 0.04
4 transaction – lot 0.08
5 transaction – lot 0.16
6 transaction – lot 0.32
7 deal – lot 0.64
If we add all this together, the total volume will be 1.27. You need a deposit size that will be able to withstand a drawdown of 18 points. As you see in the figure, we opened the last order at 108 p. Therefore, it is precisely 18 p that remains up to the maximum value of 120 p and it is precisely so many points in the worst case that the trader’s deposit should be able to “outstay” with previously opened orders.
I repeat – we can only operate with past data – they give us the opportunity to approximately evaluate the conditions in which we find ourselves: how the tool “walks”, what is the nature of the movements, what is their approximate value. Therefore, on the one hand, no one is safe from an event in which the value of the past maximum recoilless movement will be interrupted. However, on the other hand, trading is, first of all, probabilities. And the best thing we can do is to prepare for the most unpleasant scenario as well as possible + to study the conditions in which we trade. This will allow us not to relax at the same time and not to fall into bouts of fear, expecting a recoilless movement of 1000 p where the price rarely goes without a pullback of 120 p.
So, the cost of a point with a volume of 1.27 lots = $ 11.1 As we recall, the calculation is made from the price of the penultimate order. Those. you will need to be able to sit out for 40 p. Therefore, 11.1 * 40 = $ 444. Round up to $ 450.
Therefore, the minimum deposit for such parameters will be the amount of $ 450. Keep in mind that in each profitable trade you will earn 18 points in the amount of 0.01 lot, i.e. about $ 1.8. Again, you should not be upset ahead of time if at the moment you do not have such a deposit size. The numbers in the calculations are arbitrary and are given to understand the calculation method itself. It is likely that you will find currency pairs with smaller values of recoilless movements, for which the size of the deposit will be required significantly less.