Friday, 31 January 2014

RAPA: Incubating Martingale monkeys

Purveyors of zero-sum games sometimes run amusing promotions for the public, to spread the idea that everyone can be a successful options trader or poker player. But if everyone can win trading, who exactly would they be trading with? The latest example is the utterly hilarious blog "Incubating Joeys", penned by a "journalist" from the Australian Financial Review, who is part of a group learning to trade options from the geniuses at RAPA Cap Intro.

The business idea of RAPA and its main backer, the mysterious Gleneagle Securities, is that aspiring day traders will "prove" themselves on RAPA rankings, thereby attracting outside capital to play with. RAPA and Gleneagle will then charge significant fees for carrying no risk and performing no trading. The operators spruiked this scheme, in all likelihood illegally, on internet forums.

But separating performance from randomness is tricky, as pure gambling can account for strong and steady multi-year returns. This can be easily shown using the most basic maths. Many of the strategies used by the current RAPA geniuses, such as naked option selling, have the risk/return characteristics of a Martingale strategy (i.e. doubling your bets until winning or going bankrupt). Imagine a monkey starting with $100 and making coin-toss type bets. The monkey's strategy is to start with betting 1/7 of its capital each year. If it wins the monkey takes the 14.3% profit, and if it loses the monkey doubles its bet. Cumulatively this strategy has a 0.875 probability of winning 14.3%, with a 0.125 probability of losing 100%.

What is the outcome of this strategy for our monkey over five years? With greater than 50% probability, the monkey will have five straight years of wins, with a steady 14.3% return per year, and a compounded balance of $195 at the end. It can then brag to its fellow monkeys about its mad skills.

Now imagine we have a room full of incubated monkeys, a hundred bright-eyed little simians doing the Martingale, pausing only occasionally to masturbate and fling poo. Of the hundred, more than half would be expected to make it past five years. Ten of the monkeys would become masterful traders, boasting a 17 year run returning 14.3% every single year. One special monkey, let's call him Kevin, would be hailed as a genius after 34 straight years of profit. Other monkeys would flock to him, to learn his magic secret of trading.


  1. Point taken Dr, but how is this really any different to the stockmarket in general? The whole thing is a colossal scam.

    In reality, the entire monetary system is fraudulent, starting with the 'moniest' of all - the $. The government is writing bad cheques, that cannot be cashed to boot.

    1. Yes I agree the entire system is a scam, but some parts of it are more egregiously fraudulent than others.

      Thanks for reading and commenting, Scrutinizer.