Martingale Trading System

Martingale trading system is based on the popular betting (gambling) system of the 18th century's France. The main principle of this system is to double the bet each time you lose, so that if you win (considering a 100% bet win/loss each time), you recover the previous loss and will also gain the first bet amount. If one had an infinite amount of money, this strategy would be a sure-fire thing as with an infinite number of bets, the necessary result will eventually come with probability of 100%. The problem is that no trader possesses an infinite wealth and thus utilizing this strategy eventually leads to a wiped account. Although it is a very popular Forex trading system and is used in many paid Forex expert advisors, it would be foolish to use it on a live account.

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What is martingale?

Martingale system is a popular betting and trading system, which is commonly used in bets with equal or close to equal chances (red-black, odd-even, heads-tails, etc.)

According to a martingale system, a gambler (trader) should double their bet after every loss and return the bet to the initial amount with every winning bet.

For example, a gambler bets $10 on red; if they win, they bet $10 again; if they lose, they bet $20 on red; if they lose again, they bet $40, and so on. If the gambler has an infinite amount of money, they will be perpetually profitable because their next bet will not only recover the losses but will also guarantee a win of the initial bet ($10 in the example).

A martingale system was very popular in the 18th century, but it still remains popular, despite its obvious and very important disadvantage.

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Why all martingale systems fail?

Martingale traders fail because in reality they don't possess infinite funds. A losing streak of 10 rounds will require a bet of the size of 1,024 initial bets (e.g., $10,240 if your initial bet was $10) to recover from losses. A losing streak of 20 rounds will require 1,048,576 initial bets, and so on. Your next bet after a losing round should be B × 2^N, where B is the initial bet, N is the round's number.

Another problem is that the chances are usually not equal for gamblers and traders — a martingale system cannot be profitable with a chance to win less than 0.5. In roulette, red or black has only a 18/37 chance to win (because of zero); in Forex trading, there is a broker's spread, which shifts the chances against the trader.

Martingale trading systems are very popular in Forex automated trading because it is quite easy to create an expert advisor that would trade using martingale. Also, the system looks very interesting and profitable to many Forex newbies. Let's look at the example of the martingale Forex trading.

In Forex, there are flexible tools to control martingale trading — stop-loss and take-profit. One of the most obvious modifications is to use a modified stop-loss by adding the spread value to it. A Forex trader can go even farther and make stop-loss twice bigger than take-profit and quadrupling the position size after every loss. This approach looks like an attractive idea if the currency pair is volatile enough because, for example, movements of 20 pips in both directions are significantly more common than movements 40 pips. Obviously, it is an even more dangerous method.

The major problem for martingale systems in gambling is that every next result is completely independent of the previous results, so the streak of any number of losses is totally possible. In Forex, the probabilities aren't linear, so the streaks can have some inner logic dependent on the market. It makes martingale trading system less predictable and potentially profitable if optimized to the market conditions. But a well-optimized and modified martingale system ceases to be a martingale and shouldn't be discussed as one.

Despite its intrinsic flaw, it is actually recommended that every Forex trader (especially beginner) try using a martingale trading system on a demo account and see the results.

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Features

• Theoretically bullet-proof system.
• Practically unsound.
• Risk-to-reward ratio can reach extremely low values.

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How to trade?

1. Any currency pair and timeframe will work.
2. Determine your basic position size.
3. Place an order in a random direction (Buy or Sell) with some fixed stop-loss and the same-size take-profit.
4. After the SL or TP is triggered, you either win or lose.
5. If you win, set the position size to the initial and go the step 3.
6. If you lose, double the position size and go to step 3.
7. If you have infinite trading account balance, eventually you will win a lot. If your account balance is limited you will lose it eventually.

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Example

No example chart is present for this trading system as there is nothing important to be shown on the chart. Let's view the following example.

1. You start with a $10,000 account and can trade with mini-Forex lots (0.1 of the standard lot) and decide to trade on EUR/USD.
2. You define your basic position size as 0.1 lot.
3. You decide to go Long, setting stop-loss at 40 pips (or $4). The take-profit is set at the same distance.
4. You lose the trade. Now your account balance is $9,996.
5. You double your next position's size to 0.2 lots, so that using the same stop-loss and take-profit levels, you risk $8 and also have a chance to win $8. You decide to change the position's direction and go Short.
6. You win and now you have recovered the lost $4 and also won $4. Your account balance is $10,004.
7. You return your position size to the initial 0.1 lot and start over.
8. With a $10,000 account balance and a $4 basic risk value, you will have to lose 11 positions in a row to wipe out your account. You will have to win 250 positions to double your balance.

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Warning!

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Discussion

Do you have any suggestions or questions regarding this strategy? You can always discuss Martingale Trading System with the fellow Forex traders on the Trading Systems and Strategies forum.