If there is a system or trading approach that tends to trigger a fierce conflict within the community of online traders, this is surely the trading method Martingale . This is perhaps due to the fact that the Martingale approach to trading is based on probabilities and chance more than anything else. So what is this method of martingale trade and should you use it ? Read this article to form your own opinion.
What is the Martingale method?
Martingale is a theory of probabilities for gambling that was developed by a French mathematician, Pierre Levy in the eighteenth century. Without going to get too technical, from a trading perspective it focused on the Martingale method involves doubling the bet every time a loss is incurred. Taking the example of a coin toss with a 50-50 chance of heads or tails in a Martingale approach, whenever there is a loss, doubling the next bet, hoping to recoup losses and get a gain equal to the previous loss.
As you can see in the basic definition of martingale, it can be a very profitable methodology, but very risky to operate in the financial markets. The martingale approach is more popular with gambling, especially with roulette, where the chances of getting a red or black number is 50 - 50.
Therefore, to define the martingale from the perspective of trading, either in the Forex or other markets, we can say that is nothing but a process of averaging costs, where exposure increases (is doubled) for each operation loser.
Despite the risks posed by the method of martingale trading , there are a number of followers to this trading strategy. Probably better illustrate the manner of operating with martingala using a simple example.
Remember that exposure or position size is doubled (doubling the bet) after each losing trade. For this example, assume that a trader has $ 100 in your trading account and risk $ 10 initially operating in the EUR / USD.
| Operation | amount risky | Result | Profit / Loss | Balance |
| Purchase | $ 10 | Take profit achieved | $ 10 | $ 110 |
| Purchase | $ 10 | Stop loss reached | - $ 10 | $ 100 |
| Sale | $ 20 | Stop loss reached | - $ 20 | $ 80 |
| Purchase | $ 40 | Take profit achieved | $ 40 | $ 120 |
With respect to the above table we have:
- A purchase order was placed, risking $ 10. Assuming the Take Profit was $ 10, the operation achieved its goal of making profits, so the trader capital rises to $ 110.
- A purchase order was placed, risking $ 10. Here, the stop loss was hit so low equity to $ 100.
- A sell order was placed, but due to the previous operation was a losing position, the risk doubled to $ 20. This sales order resulted in a loss of $ 20 because the stop loss was reached, so that fairness is reduced to $ 80.
- A purchase order was placed and the risk doubles $ 20 to $ 40. This time, the profit target was reached, and resulted in a profit of $ 40, which means that capital rises from $ 80 to $ 120.
From the above table, it is now easier to understand if the trader had had a series of losing trades, have lost all their capital. Which brings the question, what if the martingale trading strategy is used with a currency pair or an instrument where there is a clearly established trend?Of course, in this case, the results would be impressive. However, this approach is not exempt from major risks. Essentially, it is governed by how close is the stop loss point of entry, or the amount you are willing to risk the trader / lose if the market moves against you.
Now let's look at another example martingale strategy. Suppose the EUR / USD is at 1.3000.
| Position | lots | Entry price | Actual Price | Profit / Loss |
| Purchase | 1 | 1.3000 | 1.2995 | - $ 5 |
| Purchase | 2 | 1.2995 | 1.2990 | - $ 10 |
| Purchase | 4 | 1.2990 | 1.2995 | $ 20 |
In this example, note how the position size is doubled every time the price fell 5 pips. While the total amount was risky - $ 15, when the price back to 1.2995, the gain of $ 20 was able to compensate for the loss and also gives the trader an extra benefit $ 5.
But the above table is a better example of the concept that we want to expose. Imagine what would have happened if the trend had changed and EUR / USD suddenly began to fall lower and lower. In this case, the form of negotiation Martingale would have ended with a substantial part of the capital of the trader, but is that all your trading account.
The most important point of the above example is the price movement itself. Ideally, if a trader had opened a buy at 1.3000 and the price had fallen to 1.2995, this would have resulted in a drawdown of $ 5 on equity. For its part, the following 5 pips bearish movement would have produced a drawdown of $ 10 in the equidad.Sin But thanks to the martingale approach, even though the price was lower than in the first inning, the upward movement of 5 pips in the third transaction it succeeded in converting operation in a winning position while simultaneously equity increased by $ 5 even though the price was 10 pips below the price of initial entry. In other words, thanks to the Martingale, the series of operations became a winning series. However, as we have said, this does not always happen, especially when a strong and widespread movement unfolds against the trader. Martingale trading approach in theory works. However, for this tohappen, operators need to have an unlimited equity, which is something that does not happen in the real world.
Using the Martingale (doubling the volume of operations) together with market analysis
While the system of pure martingale trading is something that is not advisable for accounts with less than $ 5,000 capital, the focus of doubling position sizes can be applied to increase profits within the structures of a trading system pre- determined .
But for this to happen, traders need to have a very high level of confidence and experience operating in the markets. Consider the following example: Here, we apply a simple strategy scalping price action based on the method of breaking trend lines.
After a first open position sale near minimum candela formed below the recoil Fibonacci 38.2%, the price started an upward movement against the operation.
After 10 pips movement against the initial operation (step # 1), the second operation is opened with 2 lots (with respect to the previous operation of one batch doubled). As the objective of making profits for both operations the same, the results are very interesting.
- If only the first operation performed without the use of the Martingale, the full benefit of this position would have been $ 15.
- If the Martingala approach is used as explained above, he has obtained an additional profit of $ 50.
The risk, of course, for such an approach will be different compared to a simple negotiating approach. In the above example, assuming that the stop loss for sales transactions was 1.02, the risk with the first operation would have been $ 27, while the martingale approach to double the volume of the subsequent operations, there would have been an additional risk $ 34.
It is easy to understand that although the methodology martingale trading can potentially increase profits, the risks are equally high and many traders are simply unacceptable, because it can lead to heavy losses and even loss of trading account with ease . In order to succeed in using the martingale methodology, traders need to have a good strategy for risk management with good preparation in technical analysis and familiarity with trading systems they use.