Famous martingale strategy

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Forex Trading the Martingale Way

Would you be interested in a trading strategy that is virtually 100% profitable? Amazingly, such a strategy exists and dates all the way back to the 18th century. The Martingale strategy is based on probability theory, and if your pockets are deep enough, it has a near-100% success rate.

The Martingale strategy was most commonly practiced in the gambling halls of Las Vegas casinos. It is the main reason why casinos now have betting minimums and maximums, and why the roulette wheel has two green markers (0 and 00) in addition to the odd or even bets. The problem with this strategy is that to achieve 100% profitability, you need a significant money supply and in some cases, your pockets must be infinitely deep.

A martingale strategy relies on the theory of mean reversion, so without a large supply of money to bore positive results, you need to endure missed trades that can bankrupt an entire account. It’s also important to note that the amount risked on the trade is far greater than the potential gain. Despite these drawbacks, there are ways to improve the martingale strategy so you can improve your chances of succeeding at this very high-risk and difficult strategy.

What Is the Martingale Strategy?

Popularized in the 18th century, the martingale was introduced by the French mathematician Paul Pierre Levy. The martingale was originally a type of betting style based on the premise of “doubling down.” American mathematician named Joseph Leo Doob continued the work of Levy in working on the martingale strategy, as he sought to disprove the possibility of a 100% profitable betting strategy.

The system’s mechanics involve an initial bet; however, each time the bet becomes a loser, the wager is doubled such that, given enough time, one winning trade will make up all of the previous losses. For instance, the 0 and 00 on the roulette wheel were introduced to break the martingale’s mechanics by giving the game more than two possible outcomes other than the odd versus even, or red versus black. This made the long-run profit expectancy of using the martingale in roulette negative, and thus destroyed any incentive for using the strategy.

To understand the basics behind the martingale strategy, let’s look at an example. Suppose we had a coin and engaged in a betting game of either heads or tails with a starting wager of $1. There is an equal probability that the coin will land on heads or tails, and each flip is independent, meaning that the previous flip does not impact the outcome of the next flip. As long as you stick with the same directional view each time, you would eventually, given an infinite amount of money, see the coin land on heads and regain all of your losses, plus $1. The strategy is based on the premise that only one trade is needed to turn your account around.

Examples of the Martingale Strategy in Action

Your Bet Wager Flip Results Profit/Loss Account Equity
Heads $ 1 Heads $ 1 $11
Heads $ 1 Tails $ (1) $10
Heads $ 2 Tails $ (2) $8
Heads $ 4 Heads $ 4 $12

Assume that you have $10 to wager, starting with the first wager of $1. You bet on heads, the coin flips that way and you win $1, bringing your equity up to $11. Each time you are successful, you continue to bet the same $1 until you lose. The next flip is a loser, and you bring your account equity back to $10. On the next bet, you wager $2 hoping that if the coin lands on heads, you will recoup your previous losses and bring your net profit and loss to zero. Unfortunately, it lands on tails again and you lose another $2, bringing your total equity down to $8. So, according to martingale strategy, on the next bet, you wager double the prior amount to $4. Thankfully, you hit a winner and gain $4, bringing your total equity back up to $12. As you can see, all you needed was one winner to get back all of your previous losses.

However, let’s consider what happens when you hit a losing streak:

Your Bet Wager Flip Results Profit/Loss Account Equity
Heads $1 Tails $ (1) $9
Heads $2 Tails $ (2) $7
Heads $4 Tails $ (4) $3
Heads $3 Tails $ (3) ZERO

Once again, you have $10 to wager, with a starting bet of $1. In this scenario, you immediately lose on the first bet and bring your balance down to $9. You double your bet on the next wager, lose again and end up with $7. On the third bet, your wager is up to $4 and your losing streak continues, bringing you down to $3. You do not have enough money to double down, and the best you can do is bet it all. If you lose, you are down to zero and even if you win, you are still far from your initial $10 starting capital.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Trading Application of Martingale Strategy

You may think that the long string of losses, such as in the above example, would represent unusually bad luck. But when you trade currencies, they tend to trend, and trends can last a very long time. The key with martingale, when applied to the trade, is that by “doubling down” you essentially lower your average entry price. In the example below, at two lots, you need the EUR/USD to rally from 1.263 to 1.264 to break even. As the price moves lower and you add four lots, you only need it to rally to 1.2625 instead of 1.264 to break even. The more lots you add, the lower your average entry price. Even though you may lose 100 pips on the first lot of the EUR/USD if the price hits 1.255, you only need the currency pair to rally to 1.2569 to break even.

This is also a clear example of why significant amounts of capital are needed. If you only have $5,000 to trade, you would be bankrupt before you were even able to see the EUR/USD reach 1.255. The currency may eventually turn, but the downside to the martingale strategy is that you may not have enough money to keep you in the market long enough to see that end.

EUR/USD Lots Average or Break-Even Price Accumulated Loss Break-Even Move
1.2650 1 1.265 $0 0 pips
1.2630 2 1.264 -$200 +10 pips
1.2610 4 1.2625 -$600 +15 pips
1.2590 8 1.2605 -$1,400 +17 pips
1.2570 16 1.2588 -$3,000 +18 pips
1.2550 32 1.2569 -$6,200 +19 pips

Why Martingale Works Better with FX

One of the reasons the martingale strategy is so popular in the currency market is because, unlike stocks, currencies rarely drop to zero. Although companies easily can go bankrupt, countries cannot. There will be times when a currency is devalued, but even in cases of a sharp decline, the currency’s value never reaches zero. It’s not impossible that a currency could reach zero, but what it would take for this to happen would be a global economic nightmare.

The FX market also offers one unique advantage that makes it more attractive for traders who have the capital to follow the martingale strategy: the ability to earn interest allows traders to offset a portion of their losses with interest income. This means that an astute martingale trader may want to only trade the strategy on currency pairs in the direction of positive carry. In other words, they would buy a currency with a high-interest rate

The Bottom Line

A great deal of caution is needed for those who attempt to practice the martingale strategy, as attractive as it may sound to some traders. The main problem with this strategy is that seemingly sure-fire trades may blow up your account before you can turn a profit or even recoup your losses. In the end, traders must question whether they are willing to lose most of their account equity on a single trade. Given that they must do this to average much smaller profits, many feel that the martingale trading strategy offers more risk than reward.

Martingale trading strategy

The history of the financial market is littered with multiple traders who used different strategies to make money. In the 30s, Jesse Livermore used a simple price action strategy to make a fortune. In the 50s, Warren Buffet started his investment company with a long-term view. Today, the company has a market capitalisation of $516 billion. In the 80s, James Simmons introduced the concept of algorithmic trading. Today, he is worth more than $18 billion. At the same time, Steve Cohen built a personal fortune of more than $11 billion by insider trading while Carl Icahn built a fortune of more than $16 billion by being a corporate trader.

These examples show how diverse the capital market is and how people have used different methods to make money. Thousands of other strategies are used every day by traders from around the world. Some of these methods like value investing and price action trading have been widely accepted. Others like the Martingale trading strategy are more controversial.

What is the Martingale strategy?

This is an old strategy developed by French mathematician Paul Pierre Levy. Paul was a famous French mathematician who laid the foundation for several probability theories like the local time, stable distributions and characteristic function.

Originally, the concept of his Martingale strategy was applied in the gambling industry. To this day, many casinos have applied his ideas to introduce betting minimums and maximums. It has also been applied in the design of the roulette wheels, which have two green markers in addition to the odd or even bets.

The strategy is based on the mean reversion ideology. According to it, a trader or gambler doubles down on a losing bet. For example, if you place a bet worth $10 and lose, the strategy recommends that you place another bigger bet. If this one loses, you initiate another bigger one. With mean reversion, the strategy assumes that at a certain point, the losing streak will reverse and that the losses will be covered by the bigger win.

Martingale strategy in trading

Financial securities move up and down every day. As they move, the securities create patterns, which include pullbacks. When a trader initiates a trade, their aim is to benefit from a trend. When they open a buy trade, their aim is to benefit from an upward trend and, when they sell, their aim is to benefit from the declining price. The most profitable trades are those which are in line with the trend.

Since the market involves risks, these trends are difficult to identify. This is why even the best traders in the world make occasional losses. When this happens for a trader using the Martingale approach, they double down on the trade.

If the original trade was to buy 0.01 lots of the EURUSD, the trader would then buy 0.02 lots. If the second trade makes a loss, the trader would buy another lot of 0.04, and if that trade loses, they double down by buying 0.08 lots. The assumption is that if the final trade makes a profit, it will cover the previous losses. The size of the lot and the price of the security, therefore, becomes better for the trade.

The approach is also based on the cost averaging method. In this method, a trader or investor doubles down on the trades when their price is moving against them. For example, assume that you have bought the stock of Daisy, LLC at $50. After a few days, an investment bank releases a report downgrading the stock, which causes the stock to fall to $40. You can decide to exit the investment with a $10 loss. However, if you believe in the company, you can continue buying the stock. If the stock recovers, you will make a bigger profit.

A good example of this is when Bill Ackman—a prominent hedge fund manager—bought the stock of restaurant chain, Chipotle Mexican Grill at $410 in 2020. A few months after buying, the stock rose to $500 before starting to fall. It reached a low of $250 in early 2020. During this time, his fund bought more shares. In the first quarter of the year, the stock started moving up, and by August, it was trading at $520. As a result, the investments he made at $250 were more profitable than the initial investment.

Risks in trading with the Martingale strategy

The Martingale approach to trading comes with a few risks and should, therefore, be used carefully. This is because the trend of security could continue to fall, which would lead to more losses. A good example of this is what happened in the gold market in 2020. In April, the price of gold reached a high of $1,365. It then started falling and reached a low of $1,160 in August. Therefore, traders who were bullish on gold and continued to double down made big losses because the trend did not reverse.

Another example is with Bill Ackman again. A few years ago, he invested in a company called Valeant Pharmaceuticals when the stock was at $150. After a few months, the stock rose to $250 and then started to fall. As it continued to fall, he bought more hoping that the stock would recover. In 2020, he was forced to exit the investment with a $4.4 billion loss.

Does this strategy work for you?

The Martingale trading strategy is quite controversial among traders. When used well, it can help you recover losses and trade effectively. However, when things go wrong, the losses can add up. Therefore, it is recommended that you take time to learn and practice it using a demo account, ensure you have a healthy account balance and have your risk management strategies in place.

What is the Martingale strategy? How does it improve your trading system?

Any veteran trader is always looking for methods to improve the trading strategy or system. On the other hand, novice traders may be slightly focused on one side. Inexperienced traders are too concerned about the input signals and this could be detrimental to other important areas. So today, we introduce you to a famous trading strategy of the 18th century, but still used today, especially trade coins bingo game.

What is the Martingale strategy?

The Martingale strategy is a popular betting strategy that dates back to the early 18th century. Today, the Martingale betting strategy has become quite famous among hundreds of different strategies worldwide. This strategy can be used in any game of chance and it should only be used for a limited time. Basically, it is to double the amount for each loss which requires double the amount of previous loss until you win. After winning, not only the previous investment is recovered, but also the profit on the last bet. However, like other strategies, the Martingale strategy has certain advantages and disadvantages.

Martingale with two results

Consider a transaction with only two results, with both having the same chance of results. Call these results A and B. The trade is structured so that your risk-reward is in a 1: 1 ratio. Assuming you decide to trade a fixed amount of $ 5 and hoping result A will happen, but then result B happens and you lose.

For the next trade, you increase your amount size to $ 10, once again hoping for result A. B again and then you lose $10. Next, you double and now trade $20 – need result A to make a profit. You keep doing this until your desired results occur. The size of the winning trade will exceed the combined loss of all previous trades. The amount that exceeds is equal to the size of the original transaction size.

Image via Betting Expert

The first trade helps you earn $5.

Lost the first trade, but won the second.

Lost $5 for the first trade and then win $10 for the second. This gives you a net profit of $5.

Lost the first two transactions, but win the third.

You lost $5 for the first trade, $10 for the second trade and then win $20 for the third trade. This gives you a net profit of $5.

You lost the first three trades, but then win the fourth trade.

You lost $5 for the first transaction, $10 for the second transaction and then $20 for the third transaction. However, you win $40 for the fourth trade. Again, you are left with a net profit of $5.

The probability that you won’t make a final profit is infinite – provided you have the amount to double. As you can see from the above example, when you eventually win, you make a profit according to your original trading size. It sounds good in theory. The problem with this strategy is that you can only apply it to make small profits. At the same time, you have a much bigger amount in pursuing that small profit.

In our example above, we are looking for just 5 dollars. But with a string of losses with only three trades, we risked $ 40. Imagine if that losing chain existed a little longer. If you lose six consecutive times, you are risking $320 to pursue your $5 profit. In other words, you are facing a loss of $315 to win $5.

What happens if your total risk capital is only $200? You have to leave the game in just a few seconds with a great loss in your hand. Your odds of winning are only guaranteed if you have enough money to continue doubling forever which is not an often situation.

Everyone has limits on their risk capital. The longer you apply the Martingale strategy, the more likely you are to experience a series of losses.

Advantages of Martingale strategy

Over time, the Martingale strategy has created confidence for players. This is due to the benefits it has in a game of chance.

  • Help the player recovery the lost money and guarantee the profit of the last bet. Therefore, a person can make money through this strategy even after losing in a row.
  • Easily understand and use it. So even if you are not experienced enough, you can still bet on the game without any difficulty.
  • Only apply this strategy for a limited time because this is a suitable system for short-term betting. However, it is necessary to control your greed when winning and your fear of losing.
  • If someone has a large capital, the Martingale betting system is optimal for such people.

Disadvantages of Martingale strategy

  • If you encounter a consecutive loss, it is not a good idea to use this strategy because it needs to have a larger amount of money in your pocket. This means spending a huge amount of money just to get extremely small profits.
  • This system is only good for a short time because it can run out of your money very fast and dangerous. In this case, you should set a limit to avoid losing huge sums of money.
  • The dealer usually sets a limit on the number of times a gambler can use the Martingale strategy. Therefore, it becomes quite difficult for you to get your money back when it is impossible to increase the bet amount for the next time.
  • The cost is so high to make a low profit that can make you fall to insecurity, or even panicking if it is a loan or transaction on behalf of another person.

Conclusion

If the odds are not improved in a period of time, this will put great pressure on you. If you keep on playing, you will have more chances to lose than to win. That’s why it is a good idea to use this strategy if you want to invest in a short amount of time and follow the discipline.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Like this post? Please share to your friends:
Best Binary Options Trading Guide For Beginners
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: