I mention about using martingale method in trading forex. Several people from Dukascopy community asked me how and some contradicting using martingale. In this article I will cover using martingale in a smart way to increase your profit in forex.
Using martingale in forex is based in probability theory. The more equity you have the more chances to cover your losses and be in profit.
" Wikipedia: “In probability theory, a martingale is a sequence of random variables (i.e., a stochastic process) for which, at a particular time in the realized sequence, the expectation of the next value in the sequence is equal to the present observed value even given knowledge of all prior observed values. ”
Martingale is popular in gambling games and widely used in games. In modern casinos they change rules to avoid martingale system. They put limits on minimum and maximum amount to bet; also they put two green fields to the roulette wheel.
" Investing.com “The Martingale system is a system of investing in which the dollar value of investments continually increases after losses, or the position size increases with a lowering portfolio size. The Martingale system was introduced by French mathematician Paul Pierre Levy in the 18th century.”
The problem of martingale is that it needs large equity. But different that gambling forex is more predictable so traders can limit their risks and minimize losses. Traders should use martingale integrated to their risk management system.
The best example to explain is coin tossing. You can use different styles of using martingale, increase to times every next bet, you can increase two time after losing bets or after second losing bet and etc.
Even with a naked eye you can see that if there were two more tails after 512 gamblers would run out of money. Running out of money is also possible in second case but for that there should be much more losing bets repeating. Why martingale works better in Forex?
Using martingale in forex is less risky than in gambling. Forex market is more predictable. It’s just that market may deviate from our prediction where we can use martingale. It won’t be any different if trader will use martingale blindly like coin tossing. Example for using martingale in forex:
Let’s look at GBPUSD chart. Price broke uptrend down. We open 0.1 lot sell on pullback and put stop loss around resistance level and downtrend line, 60 pips.
But we see that price advances and cuts our stop loss. It reaches important resistance zone. There is not fundamental reasons and important news to justify this hike. So we use this opportunity and make another sell applying martingale. We open two times more than losing trade, 0.2 lot and put stop loss above nearest resistance level, 40 pips. We believe that price should reach earlier support level around so we put take profit on 1.3223, which makes 211 pips.
As a result in first case if price didn’t cut our stop loss we would win 112 pips. But with martingale we get 200 pips with two times more lot.
" NOTE: INTEGRATE MARTINGALE INTO YOUR RISK MANAGEMENT. If your risk management allows you to lose maximum 5% of equity a day then your total loss from martingale should not be more than that limit. "
Please keep in mind that martingale multiplies profits but at the same time it multiplies risks and loss. Plan your trading and limit yourself with rules in case you decide to use martingale.