The martingale method is a trading strategy based on the probability theory. If your deposit is rather big and you trade a mini Forex lot, this strategy has a near-100% success rate.
Widely known in the trading world, the martingale was introduced by the French mathematician Paul Pierre Levy. Originally, the strategy was practiced as the popular gambling system in the 18th century. This betting style was based on "doubling down." The main principle of this system is to double the bet each time you lose so that if you win (considering a 100% bet win/loss each time), you recover a previous loss and will also gain the first bet amount. That is why one should have an infinite amount of money to ensure the stable operation of the system and achieve 100% profitability. With a theory that relies on mean reversion, one missed trade can bankrupt an entire account. Also, the amount risked on the trade is far greater than the potential gain. A lot of the work done on the martingale was done by Joseph Leo Doob, an American mathematician, who wanted to disprove the possibility of a 100% profitable betting strategy. Nevertheless, the martingale strategy is a popular Forex trading system. It is an efficient method of money management though involving high risk.
However, despite these drawbacks, there are traders who are keen to tame the martingale strategy improving chances for success. Importantly, the martingale strategy has an obvious advantage on Forex. Indeed, after a series of losing trades, a pullback will eventually come. The thing is whether a trader has got very deep pockets to withstand serious drawdowns. On the forex market, the strategy bears the same features as in gambling: doubling the bet requires infinite wealth. However, those ones who misunderstood the trend and opened wrong positions, can resort to the martingale strategy is the only way to survive ruling out the scenario that the currency pair could drop to zero.
* Let’s look at a simple example of how we can use the martingale strategy on Forex.
* Suppose we start trading with $10,000 account on EUR/USD and we can trade mini Forex lots (0.1 of the standard lot).
* We define the basic position size as 0.1 lots.
* We decide to go long setting stop-loss at 40 pips or $4. Take-profit is set at the same value.
* We lose the position. Now, the account balance is $9,996.
* We double the next position size to 0.2 lots. Using the same stop-loss and take-profit we risk $8 and also have a chance to win $8. Then, we decide to change the position’s direction and go short.
* We win. So, we have recovered the lost $4 plus won $4. Now, the account balance is $10,004.
* We return the position to initial 0.1 lots and go on.
* With the $10,000 balance and a basic risk value of $4, we will have to lose 11 positions in a row to wipe the account. Therefore, we will have to win 250 positions to double the balance.
Importantly, speculators are suspicious of the martingale strategy as a massive balance is needed to gain a small but expected profit. As a rule, traders develop an average method similar to a well-known “bubble”. So, traders operate with big amounts and using the martingale strategy, increase losses relying on profit growth in the same ratio.
