Martingale–The All or Nothing Strategy

[column size=”1-3″] [/column]
[column size=”2-3″ last=”1″] Nathan Tucci is a young trader . His trading techniques are based on Mathematics above all else. Though he understands technical analysis and fundamentals; his personal belief is that all trading success comes down to the Mathematical principles integrated into all trading. He loves to develop and improve strategies, and is constantly looking for ways to take advantage of the Forex Markets. Trained by Casey Stubbs, Nathan shares Casey’s belief that price is the truest of indicators, and a firm understanding of Price-action is vital to trading success. Nathan loves to share his lastest ideas, successes, failures and thoughts so that other people can benefit from his scientific approach to the market. Follow his latest thoughts on Twitter.[/column]

MARTINGALE

In this article, I am going to explain Martingaling, which is my favorite way to trade, but is very dangerous. Please understand that if you wish to try it, you are risking a lot.

The idea of Martingale is not a trading logic, but a math logic. It is derived from the idea that when flipping a coin, if you choose heads over and over, you will eventually be right. Though the coin may land on tails 2 or 3 or 10 times in a row, it MUST eventually land on heads. In a Martingale system, you take advantage of this truth by increasing the size of your bet.

Let’s compare the results of a long tails streak in traditional betting compared to Martingale.

TRADITIONAL BETTING DURING LOSS STREAK

 

Choice Bet Amount Result Net P/L TOTAL P/L
Heads $10.00 Tails -$10.00 -$10.00
Heads $10.00 Tails -$10.00 -$20.00
Heads $10.00 Tails -$10.00 -$30.00
Heads $10.00 Tail -$10.00 -$40.00
Heads $10.00 Tails -$10.00 -$50.00
Heads $10.00 Tails -$10.00 -$60.00
Heads $10.00 Tails -$10.00 -$70.00
Heads $10.00 Tails -$10.00 -$80.00
Heads $10.00 Tails -$10.00 -$90.00
Heads $10.00 Heads $10.00 -$80.00

 

 

MARTINGALE DURING LOSS STREAK

Choice Bet Amount Result Net P/L Total P/L
Heads $1.00 Tails -$1.00 -$1.00
Heads $2.00 Tails -$2.00 -$3.00
Heads $5.00 Tails -$5.00 -$8.00
Heads $10.00 Tail -$10.00 -$18.00
Heads $25.00 Tails -$25.00 -$43.00
Heads $50.00 Tails -$50.00 -$93.00
Heads $100.00 Tails -$100.00 -$193.00
Heads $250.00 Tails -$250.00 -$443.00
Heads $500.00 Tails -$500.00 -$943.00
Heads $1,000.00 Heads $1,000.00 $57.00

 

 

From the table, we see that with the Martingale system, no matter how long the bad streak is, when you finally win it is profitable overall. The problem with Martingale is—as you probably noticed—the risk is MASSIVE.

You may ask, how could you justify risking a thousand dollars to make a sixty dollar profit?

Well, that is a fair question, and there is a number of ways to answer it. The first is this: My goal is to make money. If that requires a lot of risk, then I am willing to do it. I would rather handle the risk to win, than have a small risk and be virtually sure to lose.

A lot of people say that Martingaling is foolish, and believe me, I understand where they are coming from. However, I do beg to differ.

In this article, we are told how foolish and dangerous Martingaling is, and I don’t blame him for telling us that, but let’s examine what he says:

1st he talks about if you go on a 20 loss streak.

In my opinion a 20 loss losing streak in Forex is impossible if you are smart about where you enter the market. Before I get into that, let’s just look at the probability of losing 20 times in a row.

In order to find the probability, we simply take ½ times itself 20 times (assuming of course that you have about a 50% chance for the market to go up or down).

The probability of a 50/50 chance going 1 way 20 times in a row is 1 in 1, 048, 576. So, purely mathematically, there is a 1 in a million chance that you would lose 20 times in a row.

Now, that is if you are flipping a coin; in my opinion, the chances in Forex would be even more ridiculous.

Here is why: In Forex Martingaling, YOU have an advantage. 1st of all, you are able to pick your entry. If you are choosing to begin a Martingale, you will be Buying low and Selling high. If you would choose to wait until the market goes 250 pips away from you before you double the position and re-target 250, the Market would have to go FIVE THOUSAND pips against you with ZERO bounces of 250 pips AFTER you already bought low or sold high in order for you to lose 20 times in a row like the gentleman in that article suggests.

Let me give you a little fact: The circumstance I mentioned above has never happened in the HISTORY of Forex.

The reason I pointed that out was simply to help you understand that when people say that a Martingale system is always doomed to failure, they are wrong. I understand that it is risky, and it is EASY to blow your account; but it is DEFINITELY not impossible to win over the long term in Forex using a Martingale strategy.

The examples I was giving were suggesting that you would be able to double your position 20 times; however, that is VERY unlikely. To be more reasonable, let us say that you can double the trade 9 times, using this array (The reason for 9 is because it is easily achievable with a 10 thousand dollar account): .01, .02, .04, .08, .16, .32, .64, 1.2, 2.5

***Notice that even with a 10k account, we are starting at a one micro-lot trade. Starting with a small size is ESSENTIAL to successful Martingaling. Here is a video that explains why Martingaling is bad http://www.informedtrades.com/7203-trading-using-martingale-anti-martingale-approaches.html Notice that his initial entry is targeting a 6% gain!! No wonder he isn’t successful with the Martingale technique.

Assuming we are making good entries, not buying too high or selling too low, this array should leave VERY little room for failure. Purely mathematically the odds are about 1 in 500 that you would lose 9 in a row; however, with good entries and a large grid, I think the chances of losing go WAY down.

For instance, using the 250 pip grid and doubling 9 times, the pair would have to travel about 2 thousand pips in the opposite direction without a 250 pip bounce AFTER we bought low or sold high. In my opinion, the chances of that are EXTREMELY low.

The hard thing about Martingaling is patience and ability to handle risk. You need to understand that you are aiming for a profit of $25 dollars on each trade (if you are using the system I showed above), and yet you are risking hundreds. This, for some people, will be too difficult to handle. If you do not think that you would be able to handle it, PLEASE do not attempt a Martingale strategy.

Hope you learned something about Martingale today, be sure to follow me on Twitter to get all my trading thoughts!

Nathan

 

 

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  • I see yes we agree on that.

  • This article is over 4 years old, he hasn’t worked for me for a while but it was not because of martingaling.

  • Mike Cleveland

    P.S. Any idea what happened to Nathan? It’s possible his vanishing was directly due to his Martingaling.

  • Mike Cleveland

    I agree that adding to trades can be a profitable way to trade, and that many traders do that. But I’m referring to a “legal” definition of Martingaling. This is not merely adding to trades, with a defined risk, it is doubling them to infinity. Martingaling will always blow out accounts, whereas adding to trades in a defined way can be successful.

  • Mike,

    If you manage your risk, and maximize your entries there are many successful traders that add to trades.

  • Mike Cleveland

    Did Nathan vanish? Martingaling always takes your entire trading account. There are those who have lost it all, and those who will. No other category. The fact that Nathan is no longer responding proves this point.

  • Nasser

    Hello Nathan

    Thank you for the explanation . I want to say for the people who telling that Forex is same like Gambling . Well it is more worse and so dirty than Gambling because every candle in every Time frame Always move against “Small Trader” positions . It is Just a matter of time and they will suck your account . To be winner who knows where big account locate their TP ans SL location and when they will change trend direction and fortunately this is so hard for small Trader accounts.

    You will be winner if you use this strategy for long term as you life investment and use risk management . It will be so great . For example if you have 10,000 with a lot of calculation . Within 10 Years you can get a more than 5000 $ monthly which is not so bad . Some body will say 10 years so long . Believe me if I used this strategy since 2008 I will get 2788 $ per month if I deposit only 10,000 . But I lost more than 30000 $ for nothing and I pay that since that time .

    Really I think seriously to go back using this way . By using big Time money ,and Risk Management at this time I will recover my lose .

  • David

    Firstly, it can easily be demonstrated mathematically that staking systems do not alter expectancy. Secondly, with uncapped doubling, you’re gaining guaranteed recovery (over a series of trades) and a greater rate of income (due to the higher average position size), but at the risk that a ‘black swan’ outcome will cause catastrophic loss. However, the inescapable fact is that if you have a positive expectancy trading system, you’ll recover your losses over time anyway, making the added risk unnecessary; and that recent losses have no greater effect on your eventual return than historical losses, hence ‘recovery’ has no mathematical basis. Since it’s impossible to test, or at least without a vast amount of statistical error, whether a ‘black swan’ outcome is more likely to occur sooner rather than later, martingale comes down to personal choice: whether the trader prioritizes maximization of income, or risk management. Read the Market Wizard books, and you’ll find that the top traders focus on the latter. None of them cite the use of progressive staking as a means of recovering loss, as part of their trading strategy.

  • Timon Weller

    Hay Nathan
    Many traders do similar and as an example can be done on brokers like Oanda for even less risk like starting at 0.02 cents per pips for those with really small accounts.. It does work, because mathematics does not lie.. The problem for many is emotions to many cause bad decisions when in draw down.. Probably because they are risking too much to begin with..

    Less risk style, 250 pips spacing like you say-

    0.02 cents per pip
    0.04 cents per pip
    0.08 cents per pip
    0.16 cents per pip

    ( 1250 pips beyond first open price.. )

    Also great to do on positive swap pairs..

    Sell at weekly highs, buy at weekly lows..

    That is more than 1000 pips.. It will not go further than that without one 250 pips retrace, it never has done a move further than that in all pairs in history ever without one retrace of some type and that is including the volatile pairs like GBPNZD..

    Regards,
    Timon

  • Leo Choo

    Excellent idea to control the risk but don’t you think that this will greatly affect the winning ratio? I mean once we got the direction wrong, we will only manage to break even instead of coming out at the end with a WIN.

  • Hamad

    Great reading Nathan. There is certainly method in the Martingale ‘madness’. I for one believe in mathematical trading instead of predicting currency movements. Could you also throw light on the system of doubling in the opposite direction after the 250 pip stop loss. (semi martingale theory). Which method do you think is more logical in the realm of forex movements.

  • LUIS ORPINELL

    Hi , im programing the martingale, works nice with trailing stop.  and is more beter a lite profits, and not consecutives loses , i have a two robots with this system and work nice.. is a danger. but works..

    http://www.myfxbook.com/members/ALEXPAILOT444  ..

  • LUIS ORPINELL

    Hi , i have 2 robots with martingale, and work nice.   pipstrider.   1.15 and 2.21 ..
    you see the test in  http://www.myfxbook.com/members/ALEXPAILOT444 

  • Anonymous

    That depends on how you structure your Martingale. The most profitable way to Martingale is actually to keep two positions open at once.. In other words, when the first position goes down -250 you keep it open and add the next position, and when it goes down-250; you cut the first position and add your 3rd.. This way, you get the second to last position at break-even instead of a 250 pip loss

  • Swaylang

    so this martingale system will require a stoploss, right ?

    otherwise, the earlier losing trades will accumulate more losses and even if the last trade is a big winner, overall it’s still a loss.

  • Anonymous

    Thanks for the comment, James. I am sorry to hear what happened with you…. But yes, if you keep it safe, it can definitely produce profit over the long term.

  • James Dempsey

    Thanks for the article Nathan. I have been trying forex trading for about 2 years now. The only time I made consistent money was martingaling. I went from $400 and somehting to about 3k in around 10-11 weeks. My strategy was somewhat different. I did know the risks of blowing the account and knew I had to maintain strict disclipline. One day the perfect storm occurred chartwise and I was in a bad mood that day and took on too much risk and boom. I have not tried it since but beleive it could have cntinued to work had I tweeked it some and maintained discipline. Your strategy is a much safer and conservative strategy. The mathmatical odds are on your side. Believe me, if the casinos banned martingaling or made adjustsments to negate it, then you know good and well there is something to it.

  • andy

    A few big moves and you are wiped out

  • Anonymous

    LOL Fair Enough!

  • Merlin

    Hi Nathan,
    So basically, taking eurusd as a current example, you would short, with a 250 pip stop and target,
    then if this is stopped out you then short double with 250/250 again, etc unyil you catch a winner?

  • Anonymous

    I beg to differ. For that to happen, you would have to lose all 18 holes in a row. If you have ever watched match play: NEVER HAPPENS. Not to mention, trading is nothing like golf 😉

  • Bharding

    Thats like the playing  a round of golf story were you double the bet every hole, by the time your at the 18th you could owe $262,144.00 from an initial $1 bet even if your a good plyer when the presure is on theres plenty that can go wrong 

  • Anonymous

    WOW. Jack, that is insane!! Very impressive!

  • Anonymous

    Very right! That is a great point.. When I said “without a 250 bounce” I should clarify that the 250 pip bounce is from the latest entry (which may actually be a 350 or 400 pip bounce from the reversal). I understand this, and still believe the strategy functions well if you stick to the rules. Thanks so much for the comment!

  • Anonymous

    Hello Dabbon., thank you much for the comment. You are a smart trader (and your mathematical notation gives you credit). You are VERY right. In a 50/50 flip, whether the first or the millionth flip, the chance is ALWAYS 50/50. My only objection is that in trading, there is some interference. For instance, I would say that if you are in a long at the bottom of the weekly support channel, the chances of it going down 250 become less than 50%, and if it does go down again they become less again… do you agree?

  • Anonymous

    Hey Gary, thanks for reading! My target is 250 pips, and because of the large target, it is good to make daily entries (make sure you’re buying low and selling high!)

  • Anonymous

    Hello Wayne, thanks for the comment. I certainly understand where you are coming from.. And I believe that your unit method could work; however, Martingaling is one of the oldest strategies in trading history, so there is a reason it has withstood the test of time. I believe that I will stick to the Martingale system because it has proven to be successful for a long time. Perhaps I will adjust it over time, but I do believe–mathematically speaking–that it has complete capability to retain profits in all market conditions. But we will see 😉 .. Thanks again for the comment!

  • Wayne Roberts

    Nathan is not just young; he’s a kid. He won’ t stay with this Martingale stuff, and he
    doesn’ t even need it. Sounds to me like he already knows quite a bit about trading.
    Doubling-up will work in a hypothetical example ( like the one he showed us ), but
    not in the REAL world. The financial and PSYCHOLOGICAL strain is just too great.
    Back in the days when I went to the race track, I fooled around with progressive
    betting ( increasing bets after losers ). Now I am not an expert on progressive
    betting — nor am I an expert on ANYTHING — but you don’ t have to double-up !!
    Sticking to the race track, let’s say you bet $2 on a race and lose. You could
    increase your bet on the next race by ONE UNIT ( in our example here, a unit is
    $2 ). Bet $4. If this race loses, on the next race, increase by one more unit. Bet
    $6. Go up one unit after a loss and down one unit after a win. Larry Williams
    mentions this kind of tactic in one of his books. He’ s trading contracts in the
    futures market. After three straight losers ( or maybe three losing days ), increase
    trades from one contract to two. He’ s not talking about doubling-up; he’ s talking
    about increasing trades by ONE unit. Note: Williams didn’ t say he actually did
    this; he just TALKED about it. Please don’ t bother telling me that my ‘ up one
    after a loss — down one after a win ‘ example is NOT mathematically balanced; I
    already know that. But if you can get 50% winners ( or close to it ) and break even
    by making the same size trades, ‘ my ‘ strategy will MAKE MONEY. Check it out
    for yourself. The reason it’ ll make money is because more money is placed on the
    winners than is placed on the losers.
    By the way, Casey, when I grow up, I want to be like you. I want six monitors in
    front of me.
                                                                                                    Wayne Roberts

  • Gary

    Good reading Nathan!

    Two questions…

    What time frame would you start your first trade on & how many pips do you shoot for your  winning target to be assuming you are starting with one micro lot 0.01

    Thanks!
    Gary  

  • Dabbon

    There was an EA on the market over the last year that was advertising itself with a 100% winning rate.  Essentially, no trades were ever closed until they were in profit, which means you would have to endure tremendous drawdowns.  If you are able to do that it’s simply a matter of waiting until the market moves in the direction you want; it always does.  My response to the developers was that in that situation I wouldn’t need an EA.  I could simply toss a coin to choose LONG/SHORT and wait (maybe a very long time) for the caprices of the market to move into favorable territory. 

    Also, I’m sure you would agree that retail traders do not have an even playing field when trades are opened.  From the very beginning of the trade you have to contend with spread which takes you out of the 50/50 arena.  Lastly, I am quick to point out that while it is accurate that the probability of flipping 10 heads in a row is (1/2)^10 ( less than a tenth of 1%), the probability of flipping the 10th head after 9 have already been tossed is still 1/2.  You could flip 1,000 heads in a row and the probability of the 1,001th head is 1/2; they have no memory of what has already happened.  The past is no indicator for independent events of what will happen in the future in probability or forex.

  • Ralukis 20 Arny

    That 250 pip “bounce” as it is referred to in the article could happen at a place where you can’t exit out at a 250 profit though. For example, let’s say you sell at 1.5000 and then sell again at 1.4750 but then the market moves down to 1.4600 and then has the 250 bounce up to 1.4850 but then it moves back down. No way to exit your trade for 250 pips profit in that case, right?

  • Anonymous

    Hey John, thanks very much for the comment. And yes, you are right! It is very stressful at times to understand the simple ratio of risk/reward that you are embarking on. I definitely do not recommend this type of trading to most people.

  • John

    I have to agree that the strategy is “can’t fail” mathematically. But from a practical trading viewpoint, my own thoughts are that a potential risk of hundreds to gain only 25 dollars
    a time sounds nerve-racking.

  • Anonymous

    Thanks for the comment… As soon as you get a win; which will cover all of your losses, you begin at the small beginning amount again.

  • Anonymous

    Thanks, Bernard. My thoughts exactly! I appreciate you reading along and leaving your thoughts! 20% a month is AWESOME!

  • Anonymous

    Thanks for the comment. . . I did not say that it was simply impossible to lose 20 in a row. I said in the circumstance that you are using 250 pips before adding and not buying too high or selling too low. The simple fact is that it would have to go 5 thousand pips in one direction with no bounce of 250 pips after the market had already gone in that direction for a while (otherwise you would not make the entry there). That has never happened in the history of Forex on the major currencies which is why I say it would be virtually impossible…. I understand the adding to a winning position as well. If you have a good concept of the trend and are able to add appropriately, I think that can be a very profitable strategy; but of course, there is always more than one way to win.

  • Anonymous

    Thanks Helen! Appreciate the comment.

  • Anonymous

    Thanks for the comment. Yes, you are right, the number is $57 (I’ll fix that now). You are also right that the bet in the table is sometimes a bit more than double. That is part of the system in betting on a coin flip or blackjack because it allows you to get a little bit larger of a reward for your risk. In trading, when you double the previous position each time, the net gain will always be the same as your initial target.

  • Rixsite

    In the second table, shouldn’t the final result be $57 instead of $67?

    Also, it looks like the bet is more than doubled in some cases ($2 to $5, $10 to $25 and $100 to $250). Is this part of the system?

    If the bet were doubled exactly each time, then your net gain on the final winning bet is only $1.

  • Helen261055

    Good article Nathan, different refreshing viewpoint. Dangerous maybe, but all strategies carry risk, and you did stress the importance of valid entries.  Would like to see more of different strategies.

  • Anonymous

    Thanks for the comment. Gaps are hardly ever an issue if you are using a large grid to add to positions, like 250 pips. However, if it were to gap and go against you beyond that grid, you can just add then and make a slight adjustment to your target. A gap shouldn’t affect your Martingaling much.

  • rakesh

    How would you handle gaps?