What is The Martingale Strategy?

In fact, the “Martingale Strategy” has existed since the 18th century, but most of the time it is used on gambling tables. Such a trading strategy is based on probability theory. If you have sufficient funds, then your trading success rate will be close to 100%.

In the trading world, the Martingale Strategy method is well known and is very common on the gambling tables in Las Vegas. This is why casinos now bet on extremely large and extremely small numbers, and why there are two green marks (0 and 00) on the roulette wheel of the gambling table. These two marks represent even and odd numbers. The problem with this strategy is that to achieve a 100% winning rate, your capital must be very large (or infinitely large).

Unfortunately, no one has an infinite amount of capital. At the same time, if the trading direction is wrong, this method will quickly blow up the account. This trading method is very risky and may be higher than your potential return. Although this strategy has many shortcomings, there are also ways to improve this high-risk and complex trading strategy. Below we will introduce several methods to improve this high-risk and complex trading strategy.

1.What is The Martingale Strategy?

As early as the 18th century, the Martingale strategy was proposed by the French mathematician Paul Pierre Levy. The Martingale strategy was originally a gambling method, which is to win back the principal by “doubling the bet”. Many specific details of the Martingale strategy were completed by the American mathematician Joseph Leo Doob. He tried to prove the possibility of a 100% winning rate in gambling.

The principle of this strategy involves the initial bet amount. When the previous bet fails, the next bet amount is doubled. In this way, as long as there is a successful bet once, all previous losses can be recovered. The two green markers on the gambling table are used to limit the Martingale strategy, because in addition to even and odd numbers (or “red and black”), there are other results. This makes the long-term profit of the Martingale strategy negative, thus discouraging people from using this strategy.

To understand the principle behind the Martingale strategy, we can look at a simple example.

Suppose we have a coin. Let’s bet on whether the coin will land heads or tails after being tossed. The initial bet amount is 1 dollar. The probability of the coin landing heads or tails is equal, both 50%, and the results of each coin toss are independent of each other and do not affect each other. As long as you keep betting on heads or tails and each bet is twice the amount of the previous bet, then as long as you bet correctly once, all previous losses will be recovered, and in the end you will earn an infinite amount of money.

Suppose you have 10 dollars and you keep betting on heads. For the first time, you bet 1 dollar.

• The first coin toss shows heads, and you earn 1 dollar (you only need to bet 1 dollar next time).
• The second coin toss shows tails, and you lose 1 dollar. Your account balance returns to 10 dollars.
• When betting for the third time, you need to bet 2 dollars. If you win, you will win back your principal and also make a net profit of 1 dollar. If you lose, your account will have 8 dollars left.
• For the fourth bet, you need to bet 4 dollars (twice the previous bet). This time you finally win and earn 4 dollars. Your account becomes 12 dollars.

According to the Martingale strategy, in this way, you can recover all previous losses if you win once. However, what happens when you have consecutive losses? As shown in the following table:

Let’s start over again. You still have 10 dollars and start betting with 1 dollar (this time you have consecutive losses).

• For the first time, you lose 1 dollar and your account becomes 9 dollars.
• For the second time, you double your bet to 2 dollars and lose again. Your account becomes 7 dollars.
• For the third time, you double your bet to 4 dollars and lose again. Your account becomes 3 dollars.

At this time, you no longer have the funds to double your bet. You can only bet the remaining 3 dollars. In the end, if you still lose, your account will be completely depleted. Even if you win, it is far less than the initial capital of 10 dollars.

2.Application of Martingale Strategy

Unless you are extremely unlucky, the above situation of running out of money will not happen. When you trade foreign exchange, exchange rates generally have trends, and trends can last for a long time. When the Martingale strategy is applied to foreign exchange trading, the key lies in “doubling the bet”, which lowers the average price at your break-even point.

In the example in the following picture, you buy EUR/USD and hold 1 lot at 1.2650. When the exchange rate drops to 1.2630, you open a second lot. When it continues to drop to 1.2610, you continue to increase your holdings by 4 lots. The average price at your break-even point drops from 1.2650 to 1.2640 and then continues to drop to 1.2625.

By analogy, your average break-even price will continue to be pulled down. When you add another 32 lots at 1.2550, at this time the average break-even price is 1.2569. Although you have already lost 100 points, as long as the exchange rate rises by 19 points, from 1.2550 to 1.2569, then you can recover all losses. If the exchange rate continues to fall, then you will face the risk of a forced liquidation.

This is why you need a very large amount of capital to use the Martingale strategy. If you only have 5,000 dollars, you will lose all your capital before the exchange rate drops to 1.2550. The exchange rate may eventually rebound, but in most cases, you do not have enough capital to survive until the exchange rate rebounds.

3.Is the Martingale strategy more effective in trading?

One of the reasons why the Martingale strategy is so popular in foreign exchange trading is that, unlike the stock market, exchange rates will not fall to zero. Although companies can easily go bankrupt, countries will not. Sometimes, when a currency depreciates, even if it depreciates at a very fast speed, it will not fall to zero. Of course, if the exchange rate really falls to zero, it will be a very terrible thing.

The foreign exchange market has its unique advantages. For traders who have sufficient capital to implement the Martingale strategy, the foreign exchange market is very attractive. Traders can earn interest to offset part of their losses. Traders can buy high-interest-rate currencies and sell low-interest-rate currencies. If the held position is very large, then the earned interest will also be substantial, which can also reduce the average break-even price.

4.Conclusion

The Martingale strategy may sound good, but we need to strongly emphasize here that traders who hope to try this trading strategy need to be vigilant about the risks. The Martingale strategy is extremely risky. Often, before you are waiting for the price to rebound, your account has already been depleted. In the end, traders must determine whether it is worth taking such a risk to try the Martingale strategy.

Reproduction Notes：InvestFancy » What is The Martingale Strategy?