As you already know, today there are hundreds of different strategies for trading and the martingale is one of the best known. Is it because it is the most profitable? What is this fame for? Can you really win with a martingale system?
1. How does the martingale system work?
This method began to be used in the world of betting with the objective of large profits in exchange for the risk of ending up in bankruptcy. It even started to be limited in casinos because customers ended up losing much more than they expected to win.
Its creator was Paul Pierre Levi in the 18th century, who made strategy popular in the world of chance, since basically it is about doubling the bet after having generated a loss.
Yes, as is, the intention is to keep doubling the bet until a profit is generated. In the event of a win, the bettor can recover everything played and the profit of the initial bet is added. If this is not the case and a hit is not produced, the player, after running out of chips, has no choice but to retire with empty pockets.
I give you a simple example. When tossing a coin you have two options: heads or tails. Your initial bet is 10 euros in favor of heads appearing on the next toss. You will be with me that here there is the same possibility that the bet will fall on the same side as it will also fall on the opposite side (50%).
Considering that each launch is independent and after several launches with a result against your bet, after having doubled the bet 3 or 4 times and only one victory, you will recover the loss and a double profit compared to the initial. A single victory not to lose everything, this is one of the great attractions of the martingale
2. Apply the martingale system to trading
In trading this applies in a similar way, since the key to martingale strategies when trading is to increase the size of the position as the price goes in the opposite direction.
By trading instead of doubling, you can increase the size of the bet by 1.1, 1.2, 1.3… a multitude of variants and scenarios, although as we will see below the effects usually have the same ending.
One day someone presents you with a seemingly very winning trading system. It is December 2012 and it has already been over a year and a half with excellent results.
You decide to ignore it because you already know what the martigala strategy is and its consequences. Weeks later you decide to review it again and see a drop of 87%. About to lose everything in a few days. When you see this, you know where you don’t have to put your time and money and how they can end up if you do.
3. Forex Martingale Strategy
Let’s go with an example of a martingale in forex. You enter EUR/USD by buying two lots. Your goal is for it to make a move to 1.1598. However, the price goes down and you add two more lots at 1.1568. Now the price will only have to reach 1.1583 (new breakeven point) for you to make a profit. The higher the number of lots you enter, the lower the breakeven point will be (the average entry value among all trades already open).
This is one of the reasons why a person with more capital has a higher level of security to recover after a few losing trades. Although for this method to work you should have infinite money. Why? Because your pocket will always be less than the possibility that the next operation will be a loser or the price will go against you.
4. Investment and trading systems based on a martingale strategy
One of the most famous martingale-based systems is the grid or grid, which is associated with Forex because it is where it is quite popular. There are many traders who use this technique to trade Forex, but this does not mean that it can be considered a winning system.
The idea here is to divide the chart into grids and place buy and sell orders in each section, with the intention of taking advantage of the rise in the market.
In the traditional method, you enter a buy and a sell in each section and take advantage of the idea that sideways movements in Forex trading are common. If you look at a 5 or 15 minute chart, you can see how on many occasions the price has been without a clear trend for several days. They are usually somewhat wide ranges and that can provide many operations, the problem that can be found in the price leaving the range and generating insurmountable losses.
The only advantage and why this type of system is so common and applied is because they do not need to predict the trajectory of the market, because if it goes in one direction or another, they always cover its position.
Over time, you can find some of the winning grid systems, they usually have a preference component, in addition to cordoning off maximum losses, so as not to get into unsustainable situations. There are many variants of martingales on the Internet, more or less aggressive, but the vast majority have negative positive hope, they are losers.
5. Because the martingale works better in forex
One of the reasons why the martingale is so well known in the forex market compared to the stock market is because it is practically improbable that the exchange rate of a currency pair will reach zero. Publicly traded companies can go bankrupt, a country’s currency hardly will.
There will be times when a currency depreciates, but even in cases where there is a sharp decline, the value of the currency does not go to zero. It’s not impossible, but what it would take for this to happen is something very, very extreme.
You may have heard some traders talk about applying the martingale on currency pairs with positive swaps. With a large number of lots, interest income can be very significant and reduce risk. Sounds good right? With a high number of lots the account can go bust with a small movement.
6. Risks in martingale
If you are willing to apply this strategy, you must first ask yourself if you are willing to lose most of the account capital in a single trade.
Taking into account that the martingale offers a very high risk-reward pattern, it is unacceptable in any professional practice, since it is not considered in itself as a strategy that offers solidity when implemented correctly.
These types of strategies are good in theory, but a scam in practice. If you want to develop professional trading, you must understand that it is necessary to contemplate the loss and assume it within a normal scenario, without in any case implying that you can lose all your money.
7. Martingale trading methodology
The vast majority of automatic systems sold on the Internet are martingale-based systems, with a real account of little time. Then they go bankrupt, delete that account and create a new one. It is profitable for them to lose that money because their real business is selling the systems.
How can you identify them? They are systems with a high percentage of success and that have little volatility, constant profits… too beautiful to be real. They are usually represented with almost perfect curves. If you do not see negative trade dips and closes, there is a chance that it is a martingale.
This is by no means to say that all systems that are sold or all automated systems are like this. But there is a lot of scam undercover about this and I recommend you to be alert with it.
Thank you for reading!