Martingale Strategy: A Risky Way to Make Money

15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

The Martingale strategy in Forex trading, a topic often shrouded in controversy, presents a unique blend of risk and reward. This strategy, hinging on the principle of doubling down on losses, holds a peculiar allure for traders seeking to turn the tide of their fortunes.

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In exploring how the Martingale strategy works in the volatile Forex market, we delve into the intricate balance between calculated risk-taking and potential gains.

Such an approach requires not only an understanding of market dynamics but also an ironclad discipline in risk management.

In this article, we will cover the Martingale Strategy, which is my favorite way to trade but is very dangerous. Please understand that if you wish to try this Forex strategy, you are risking a lot.

Martingale Strategy in Forex Uncovered

The idea of aย Martingale Trading Strategyย is not a trading logic but a mathematical one. It is derived from the idea that you will eventually be right when flipping a coin if you choose heads over and over.

Though the coin may land on tails two, three, or 10 times in a row, it MUST eventually land on heads. In a Martingale Trading Strategy, you take advantage of this truth by increasing the size of your bet. If you want to learn an easier strategy, feel free to read ourย risk-to-reward ratioย guide.

Letโ€™s compare the results of a long tails streak in traditional betting compared to the Martingale Trading Strategy.

Traditional Betting During a Loss Streak

ChoiceBet AmountResultNet P/LTOTAL P/L
Heads$10.00Tails-$10.00-$10.00
Heads$10.00Tails-$10.00-$20.00
Heads$10.00Tails-$10.00-$30.00
Heads$10.00Tail-$10.00-$40.00
Heads$10.00Tails-$10.00-$50.00
Heads$10.00Tails-$10.00-$60.00
Heads$10.00Tails-$10.00-$70.00
Heads$10.00Tails-$10.00-$80.00
Heads$10.00Tails-$10.00-$90.00
Heads$10.00Heads$10.00-$80.00

Martingale Trading Strategy During a Loss Streak

ChoiceBet AmountResultNet P/LTotal P/L
Heads$1.00Tails-$1.00-$1.00
Heads$2.00Tails-$2.00-$3.00
Heads$5.00Tails-$5.00-$8.00
Heads$10.00Tail-$10.00-$18.00
Heads$25.00Tails-$25.00-$43.00
Heads$50.00Tails-$50.00-$93.00
Heads$100.00Tails-$100.00-$193.00
Heads$250.00Tails-$250.00-$443.00
Heads$500.00Tails-$500.00-$943.00
Heads$1,000.00Heads$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, that the risk is massive.

You may ask, how could you justify risking $1,000 to make a $60 profit?

Well, that is a fair question, and there are a number of ways to answer it. The first is this: My goal is to make money. If that requires a lot of risks, 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.

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

Inย this article, we are told how foolish and dangerous the Martingale Strategy in Forex is, and I donโ€™t blame him for telling us that, but letโ€™s examine what he says:

First, he talks about if you go on a 20-loss streak.

I believe a 20-loss losing streak in Forex is impossible if you are smart about where you enter the market. Before I get into that, letโ€™s just look at the probability of losing 20 times in a row.

To find the probability, we simply take ยฝ 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 one way 20 times in a row is one in 1,048,576. So, purely mathematically, there is a one-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: YOU have an advantage in the Martingale forex system. First of all, you can pick your entry. If you choose to begin a Martingale, you will buy low and sell high.

However, if you chose 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 5,000 pips against you with 0 bounces of 250 pips AFTER you already bought low or sold high 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 theย 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 know that it is risky, and it is EASY to blow your account. Still, it is DEFINITELY not impossible to win over the long term in Forex using a Martingale Trading Strategy.

The examples I was giving suggested 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 nine times using this array (The reason for nine is that 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 start at one micro-lot trade. Starting with a small size is ESSENTIAL to successful Martingale strategies.

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 one in 500 that you would lose nine in a row. Nevertheless, 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 nine times, the pair would have to travel about 2,000 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 tricky thing about the Martingale trading strategy is patience and the ability to handle risk. You need to understand that you are aiming for a profit of $25 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 manage it, PLEASE do not attempt a Martingale strategy in Forex.

I hope you learned something about the Martingale System today. Make sure to follow me on Twitter to get all my trading and Forex strategy thoughts!

Nathan

Conclusion

The Martingale strategy in Forex trading stands as a testament to high-risk, high-reward methodologies in financial markets. While itโ€™s very risky and not for everyone, the Martingale strategy works, and if used correctly, anyone can make a lot of money.

This strategy, with its potential for significant returns, also carries the risk of substantial losses. Ultimately, the successful application of the Martingale strategy requires not only a deep understanding of market dynamics but also a robust risk management framework.

It requires readiness to face the unpredictable nature of Forex markets.

About the Author

Nathan Tucci - Author For The Martingale Strategy.
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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.ย 

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 Caseyโ€™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 latest ideas, successes, failures, and thoughts so that other people can benefit from his scientific approach to the market.ย Follow his latest thoughts on Twitter.

Thank you for reading!

Please leave a comment below if you have any questions about the Martingale Trading Strategy!

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15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

43 Comments

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    • 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 shouldnโ€™t affect your Martingaling much.

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

  2. In the second table, shouldnโ€™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.

    • Thanks for the comment. Yes, you are right, the number is $57 (Iโ€™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.

  3. 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 impossibleโ€ฆ. 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.

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

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

  6. I have to agree that the strategy is โ€œcanโ€™t failโ€ 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.

    • 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.

  7. That 250 pip โ€œbounceโ€ as it is referred to in the article could happen at a place where you canโ€™t exit out at a 250 profit though. For example, letโ€™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?

    • Very right! That is a great point.. When I said โ€œwithout a 250 bounceโ€ 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!

  8. There was an EA on the market over the last year that was advertising itself with a 100% winning rate.ย  Essentially, no trades were ever closed until they were in profit, which means you would have to endure tremendous drawdowns.ย  If you are able to do that itโ€™s simply a matter of waiting until the market moves in the direction you want; it always does.ย  My response to the developers was that in that situation I wouldnโ€™t need an EA.ย  I could simply toss a coin to choose LONG/SHORT and wait (maybe a very long time) for theย caprices of the market to move into favorable territory.ย 
    Also, Iโ€™m sure you would agree that retail traders do not have an even playing field when trades are opened.ย  From the very beginning of the trade you have to contend with spread which takes you out of the 50/50 arena.ย  Lastly, I am quick to point out that while it is accurate that theย 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.ย  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.ย  The past is no indicator for independent events of what will happen in the future in probability or forex.

    • 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 againโ€ฆ do you agree?

  9. Good reading Nathan!
    Two questionsโ€ฆ
    What time frame would you start your first trade on & how many pips do you shoot for yourย  winning target to be assuming you are starting with one micro lot 0.01
    Thanks!
    Gary ย 

    • 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 youโ€™re buying low and selling high!)

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