In this article, we will cover the Martingale System, 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.
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|
MARTINGALE DURING LOSS STREAK
|Choice||Bet Amount||Result||Net P/L||Total P/L|
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 risks, then I am willing to do it. I would rather handle the risk to win, then 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 the Martingale forex system, 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 strategy.
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 one micro-lot trade. Starting with a small size is ESSENTIAL to successful Martingaling.
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 the Martingale System today, be sure to follow me on Twitter to get all my trading and forex strategy thoughts!
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 latest ideas, successes, failures, and thoughts so that other people can benefit from his scientific approach to the market. Follow his latest thoughts on Twitter.
Winner’s Edge Trading, as seen on: