If you have been involved in forex trading then more or less you have heard of the Martingale trading strategy. But what is the Martigale strategy and how does it work? In this article, Papatrader will show you the strengths, risks and how to use them.
Watching: What is a Martingale?
So what is a Martingale strategy
?Martingale is a type of betting strategy in which an open trader doubles their volume every time they lose.
The idea is that just 1 winning trade will recover all previous losses and make a profit.
For example: As simple as a coin toss game, if the first game you lose 1$, the next game you will bet 2$. But in Forex trading it is usually the trader that will have a larger position after the first one loses. (with the first trade still being held).
An overview of how to enter a variant Martingale style (Rate of 0.1Lot for 1 time)
Number of Orders Type Buy Price Market Price Volume Return 1 Buy $1.19100 $1.18650 0.1 -45$ 2 Buy $1.1950 $1.18650 0.2 -80$ 3 Buy $1.19000 $1.18650 0.3 -105$ 4 Buy $1.18950 $1.18650 0.4 -120$ 5 Buy $1.18900 $1.18650 0.5 -125 $6 Buy $1.18850 $1.18650 0.6 -120$ 7 Buy $1.18800 $1.18650 0.7 -105$ 8 Buy $1.18750 $1.18650 0.8 -80$ 9 Buy $1.18700 $1.18650 0.9 -45$ Total -825$
It is understood that the market price goes against your trend, you will enter an order with an increase in volume of 0.1 Lot / time every time the price drops to 5pip. With the hope that the price will recover by 1/3, the trader was able to remove all negative orders.
Does this strategy work
?In a pure Martingale system, there is no complete chain of trades that will lose. If the price moves against you, you simply double the volume.
See also: What is a Puzzle?
But such a system cannot exist in the real world because no one has unlimited money and unlimited time.
In a real trading system, you need to put a limit on the drawdown of the entire system. When you cross the Drawdown limit, all trades will stop loss. The cycle can then start again.
When you limit the Drawdown ability, you are no longer using the pure Martingale system. And in doing so, you are using the variant Martigale trading strategy.
The overall outcome of the Martingale strategy is mostly small wins, with occasional catastrophic losses. The strategy will fall apart if you encounter a string of losing trades. The exponential growth is extremely powerful and leads to huge numbers very quickly. Therefore, doubling down can lead to unmanageable large transaction volumes.
In such a scenario, continuously increasing trading volume is unsustainable. You will definitely be forced out of the market with a huge loss. If we had a group of traders using this strategy for a limited period of time, we would find that most would make small profits because they avoid a consecutive loss and any whoever is unlucky enough to hit a long losing streak will suffer a punishing loss.
See also: What is Open House – Meaning of the word Open House
So while Martingale’s results sound gratifying, the strategy is too inconsistent to be used regularly. However, it provides value and is a great tool for better understanding the market. If you want to test the Martingale strategy, the best way to start is in a risk-free trading environment. A demo trading account can help you find the strategy that works best for you.