One of the strategies in the trading world is the Martingale method, the essence of which comes down to a series of transactions calculated in accordance with the mathematical theory of probability.
A bit of history
The trading phenomenon has come from gambling. The first mention of it appeared in the middle of the XVIII century. Then the Martingale method was successfully used during the game of roulette. This forced casino owners to change the rules and limit the maximum bet.
According to some historical information Martingale was called a collar, which was specially worn on the horse so that it would not throw back its head too much, as a limitation, do you catch an analogy?
This word is also in the terminology of the sailors, where it means one of the reinforcing fragments of the ship’s rigging.
What is martingale in trading?
The parallels with the market are obvious – the phenomenon is based on the principle of limiting and applying increasing power after each negative result. Literally, the term means “to play in an absurd way.” Judging by the value, it is clear that the method refers to high-risk and highly profitable trading strategies.
It is because of this that newcomers who come to the exchange with small deposits love it most of all. Naturally, their first goal – to disperse the deposit quickly. Experienced participants of the exchange are wary of the method, they resort to it occasionally, because the risk of a deep drawdown or a complete drain of the deposit is too high.
But despite this, there are grounds for using the Martingale method in trading.
When the market turns against you, all that is needed is just to wait. Sooner or later, he should go in your direction, because the theory of probability based on mathematical analysis, has not been canceled.
But to wait for a favorable trend, you must have not only patience, but also a sufficient amount of money. The deeper the drawdown becomes, the more you need to open additional trades in the direction of an open position. Yes, it is open – that position, which is in a decent minus.
From the outside, it seems that the trader is trying to reverse the price movement, spends on it a lot of effort and money, which is almost at the end. Then, when the market is finally turning in his direction, the trader has a decent amount of open positions, allowing you to compensate for all the losses in one fell swoop and get a significant plus. This is the Martingale method.
Lack of martingale
The key disadvantage is that the method is very demanding on the size of capital. After all, your deposit should, in case of which, withstand a possible huge drawdown until the moment when the market turns around. But the reversal may not happen!
The danger is that on a long period of drawdown you may not have enough money to continue to open positions. Therefore, theoretically, the size of the deposit should be huge. But investors with such opportunities in the market are few, and it is senseless to trade in small rates – they will not bring the expected profitability.
Therefore, remember – this strategy can not be applied with a small deposit. Too great a threat to lose it completely!
Martingale Strategy Varieties
- In a simplified form, each subsequent opening position is doubled on the principle of a geometric progression.
- A less risky and profitable type is the use of an arithmetic progression, when each next rate does not double, but by a certain amount of interest (30, 40, 50 and more).
Martingale and Forex
In its classic format in Forex, it does not apply. Most traders who use it, adapt it to their strategy. More often here lots are increased by complex calculations – this allows minimizing potential losses, but potential profits also decrease.
The Martingale strategy has a rather simple algorithm that allows building automated trading systems based on it .
With manual trading, it might look something like this:
- choose a currency pair;
- In accordance with the strategy, we open a trade with a minimum lot and at the level of 50 points set a stop loss and take profit;
- if you have closed a deal on take profit, then further trading can be carried out further along the main strategy;
- when you close a trade at a stop loss, then open the next one in the same direction, while increasing the lot twice.
To automate the process at the stop and profit levels, set pending orders that automatically open new trades.
To reduce the risk, trade only in accordance with the current trend.
If you apply an arithmetic progression, then you do not double the lot, but increase it by 30-40 percent. Then the feet increase under the condition of positive dynamics, and profits are not used.
What categorically can not be done?
As a rule, all the mistakes of traders are connected with psychological aspects:
1. You can not overstate the size of the lot
It is clear that the Martingale formula is used to maximize the results in trade. Let’s say a newbie has a series of losing trades. If there are more than 5 of them, then, trivially, there may be no money left for doubling the lot and the case will lead to a drain on the deposit.
2. You can not use the method on the minimum deposit
We have already written above that hoping for a miracle is more than naive. With a couple hundred dollars in the Martingale cage is categorically inapplicable.
3. You can not trade without a strategy
Blindly doubling trades, hoping that Martingale will block losses – is stupid. To reduce loss-making transactions to a minimum is possible only with a trading strategy.
The whole method is based on three pillars – strategy, the minimum lot size and a solid deposit . Only with the presence of all three components can you guarantee the preservation of the trading account.
Success is possible only if you correctly understand the basic principles of Martingale. The classical method based on a geometric progression is calculated from the ratio of profitable transactions to unprofitable in a ratio of 1: 1. If the trader maintains the ratio in favor of profitable transactions, then the trading results will be higher.
And if the trader uses a loss-making strategy, then even the Martingale will not save him from losing the deposit.
Arm yourself with common sense when recalling the proverb “Either pan or go missing.” It reflects the whole essence of this strategy. To use it or not is up to you. Our business is to warn about possible risks.