General

What Is Martingale, and Should You Use It

Martingale is a strategy that is designed to keep a gambler in the game until he wins. Without saying it; the gambler would have been passing through a series of losses, which is why the clause “until he wins” comes in.

This is a system based on the theory that the longer the gambler keeps playing, the more likely it is that he will win. For example; a person who gambles on a coin toss (for heads), but who losses, the bet keeps on gambling, this time doubling the initial bet, with the knowledge that the coin will eventually land on heads. When that happens he recovers the previous losses, and even makes a small profit.

This system of gambling became quite popular in the 18th century, especially in France where it was developed by a mathematician named Paul Levy.

What To Know About The Martingale System

All over the internet, there is plenty of information shouting out loud that the martingale system is dangerous. One thing to know about it is that the person who stipulated the idea meant it for simple and straightforward gambling in which there are only two possible outcomes: heads or tails.

In other words; the first condition is that the possible outcomes should be only two; when it is applied to anything else; say a dice game in which the dice could fall on 1,2,3,4,5 or 6, the odds become exponentially against the gambler, and quite difficult to calculate.

Furthermore, even in a coin toss, the game must be fair; not rigged by the house to ensure that it continues to fall in its favor.

Using The Martingale System To Trade Forex And Binary Options

The martingale system has been applied to many different forms of gambling, including forex trading, which can be a form of gambling. The idea is to double the lot in the event of a loss, and to repeat the action until the price moves in the trader’s favor, thus recovering previous losses, and turning in a small profit.

There are even many forex robots programmed to trade forex using the martingale strategy. The idea is quite popular among newbie traders. Why newbie traders?

Seasoned traders know that the markets can be irrational longer than they can stay solvent; a few bad days is all it takes to blow an account using this strategy. This is because even with a 1 dollar bet; it only takes a few hours or even minutes to be $100 in the negative. 1,2,4,8, 16, 32, 64, 128. Now the question is; would you risk $128 just to profit $1?

Risking Big To Get Small

It looks mathematically possible; if the gambler has an infinite supply of cash; and if the broker or the house had no rules against big stakes; it would seem that the bet would in time fall in the favor of the trader or gambler.

Risking big to get a small profit would then not matter. However, it must be noted that most traders do not have infinite supplies of cash, and also most brokers have limits to the lot sizes that they allow on their platforms.

Having said that; it is quite possible to use the martingale strategy; if the following hold true:

When Martingale Can Work

The Martingale strategy can work under the following circumstances: if the game will not go against the gambler or trader for a long period of time. For example; if a trader has a very good win rate; 60% for instance- meaning that he wins 6 trades out of 10.

In such a circumstance he could aggressively double the stake with the knowledge that he would recover the losses even after 4 straight loses.

That is theoretical; and the dynamic nature of the forex market makes it unlikely that any one particular strategy would keep going at such a win rate. In order words; what happens after the fifth loss?

Martingale Can Be Risky

It is not uncommon for the markets to become suddenly irrational, and for previously efficient systems to fail. A system with 60% win rate is no longer 60% when it makes the 5th straight loss. At best it becomes a 50% win rate; and then there is the possibility that it may continue making losses, therefore becoming even more dangerous to maintain.

The question is: what should the trader do in such an instance? Fold, or keep going? Perhaps a trader with an infinite supply of cash could keep going. If one decides to cut the losses, then he would be accepting an infinitely bigger loss than he could have managed just by trading simple lots.

Closing

This has been a simple assessment of the martingale system; it is not a comprehensive review, and certainly not a recommendation to do anything. Newbie traders would do well to learn how to trade, rather than look for quick fixes which in many cases can be counterproductive.

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