Martingale Strategy in Forex Trading

Would you be interested in a virtually 100% profitable trading strategy? Surprisingly, such an approach exists and dates back to the 100th century. The Martingale strategy is based on probability theory. If his pockets are deep enough, he will have a nearly XNUMX% success rate.

Would you be interested in a virtually 100% profitable trading strategy? Surprisingly, such an approach exists and dates back to the 100th century. The Martingale strategy is based on probability theory. If his pockets are deep enough, he will have a nearly XNUMX% success rate.

The martingale strategy was most commonly practiced in salons. casino game from Las Vegas.

It is the main reason why casinos now have wagering minimums and maximums.

The problem with this strategy is that you need a significant supply of money to reach 100% profitability. In some cases, your pockets must be infinitely deep.

A martingale strategy is based on the theory of mean reversion. Without an abundant supply of cash to get positive results, you have to endure losing trades that can bankrupt an entire account.

It is also important to note that the value risked in trading is much greater than the potential gain. Despite these drawbacks, there are ways to improve your martingale strategy that can increase your chances of success.

Main advantages of the Martingale strategy

  • The mechanics of the system involve an initial bet that is doubled each time the bet loses.
  • All you need is a winning result to recoup all your previous losses.
  • Unfortunately, a long enough losing streak causes you to lose everything.
  • The martingale strategy works much better in Forex trading than in gambling because it lowers the average entry price.

How does the Martingale strategy work?

How does the Martingale strategy work?

The martingale was introduced by the French mathematician Paul Pierre Levy and became popular in the 2th century. two

The martingale was originally a type of betting style based on the premise of “doubling down”.

American mathematician Joseph Leo Doob continued to work on the martingale strategy. However, he sought to disprove the possibility of a 100% profitable betting strategy.

The mechanics of the system involve an initial bet that is doubled each time the bet loses.

Given enough time, a winning trade will offset all previous losses.

The 0 and 00 in roulette were introduced to break the martingale mechanics, giving the game more possible outcomes.

Expected long-term profit from using a martingale strategy in roulette would be negative and thus discourage players from using it.

To understand the basics behind the martingale strategy, let's look at an example.

Suppose we had a coin and engaged in a coin toss game with an initial bet of $1.

There is an equal probability that the coin will come up heads or tails. Each roll is a random variable, which means that the previous roll does not affect the next roll.

If you doubled your bet every time you lost, you would end up winning and recouping all your losses plus $1.

The strategy is based on the premise that only one trade is needed to grow your account.

Examples of the Martingale Strategy in Action

your bet Bet Results profit/loss account equity
Face $1 Face $1 $ 11
Face $1 Crown $ (1) $ 10
Face $2 Crown $ (2) $8
Face $4 Face $4 $ 12

Suppose you have $10 to bet, starting with the first $1 bet.

You bet heads, the coin is flipped this way, and you win $1, bringing your equity to $11.

Each time you are successful, you keep betting the same $1 until you lose.

The next play is a loser, and you bring your account equity back to $10. On the next bet, you bet $2 to recoup your previous loss and increase your net profit from $0 to $2.

Unfortunately, he falls into the crown again. You lose another $2, reducing your total equity to $8.

Following the martingale strategy, you double your bet to $4 on the next bet. Fortunately, you get it right and you win $4. This brings your total net worth to $12.

As you can see, all you needed to do was win a bet to recoup all your previous losses.

However, let's consider what happens when you hit a losing streak:

your bet Bet Results profit/loss account equity
Face $1 Crown $ (1) $9
Face $2 Crown $ (2) $7
Face $4 Crown $ (4) $3
Face $3 Crown $ (3) ZERO

You once again have $10 to bet, with an initial bet of $1.

In this case, you immediately lose on the first bet and reduce your bankroll to $9.

You double your bet on the next bet, fail again and end up with $7. On the third bet, your bet goes up to $4. Your losing streak continues, taking you to $3.

You don't have enough money to double down, and the best you can do is go all in. You then go down to zero when you lose, so no combination of strategy and good luck can save you.

Would you be interested in a virtually 100% profitable trading strategy? Surprisingly, such an approach exists and dates back to the 100th century. The Martingale strategy is based on probability theory. If his pockets are deep enough, he will have a nearly XNUMX% success rate.

Strictly applying the martingale strategy yields a 100% success rate until it ends with the complete loss of all capital.

Application of the Martingale strategy for trading

You might think that the long streak of losses, as in the example above, would represent unusual misfortune.

But when you trade currencies, they tend to be trending, and trends can last a long time.

The trend is your friend to the end. The key with a martingale strategy, when applied to trading, is that by “doubling down” you lower your average entry price.

In the example below, in two lots, you need EUR/USD 1,263 to 1,264 to balance. As the price drops and you add four lots, you only need to move up to 1,2625 instead of 1,264 to break even.

The more lots you add, the lower the average entry price. You can lose 100 pips on the first lot of EUR/USD if the price reaches 1,255. On the other hand, you just need the currency pair to move up to 1,2569 to break even.

This example also provides a clear example of why significant amounts of capital are required.

If you only have $5.000 to trade, you will be broke before you see the EUR/USD hit 1,255. The currency should eventually flip, but you may not have enough money to stay in the market long enough to reach a successful ending. This is the downside of the martingale strategy.

EUR/USD Lots Average price or Break-Even Accumulated Loss balance movement
1.2650 1 1.265 $0 0 point
1.2630 2 1.264 - $ 200 +10 points
1.2610 4 1.2625 - $ 600 +15 points
1.2590 8 1.2605 - $ 1,400 +17 points
1.2570 16 1.2588 - $ 3,000 +18 points
1.2550 32 1.2569 - $ 6,200 +19 points

Why Martingale Strategy Works Best with Forex

One of the reasons the martingale strategy is so popular in the foreign exchange market is that currencies, unlike stocks, rarely drop to zero.

While companies can easily go bankrupt, most countries do so by choice. There will be times when a currency drops in value. However, even in cases of sharp decline, the value of the currency rarely goes to zero.

 O Forex market also offers another advantage that makes it more attractive to traders who have the capital to follow suit. Martingale strategy.

The ability to earn interest allows traders to offset a portion of their losses with interest income. This means that an astute martingale trader may want to use the strategy on currency pairs in the direction of a positive move.

In other words, they would borrow using a low interest rate currency and buy a currency with a higher interest rate.

Summarizing the Martingale Strategy

A lot of caution is required for those trying to practice the martingale strategy, as attractive as it may seem to some traders.

The main problem with this Martingale strategy is that seemingly foolproof trades can blow your account up before you can profit or even recoup your losses.

In the end, traders must question whether they are willing to lose most of their account equity in a single trade.

Given that they must do this for much smaller average profits, many feel that the martingale trading strategy offers more risk than reward.

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