Martingale strategy – overview, how it works, drawbacks
Posted on March 18, 2021 by Jonathan Symcox
The Martingale system is a known betting strategy that used to be popular in France back in the 18th Century.
But it’s not only a betting strategy – it is also a plan that you can use for your trading ventures. Most of the time, people stay away from it fearing a potential loss, but if you know how to use it, it will bring you the profit you’ve been aiming for.
But how do you use Martingale trading strategy in Forex? Moreover, are there any disadvantages to it? With the boom in female crypto traders and the increase in interest in trading, it’s important to know what to expect.
This article will explain the Martingale strategy so you can decide if it’s something you want to use or not.
What is the Martingale strategy?
The Martingale strategy is a system that implies a loss for the trader. The trader will use an amount for the trade, and when a loss happens, he/she will double the amount. If the trader wins, then a profit will be generated.
Therefore, you will be able to recover the money you lost and cover these losses.
How does it work exactly?
This investing method is pretty risky, which is why you rarely see traders using it. Most of the time, if a trader considers this method, it is because they have enough experience to know what they’re doing.
The Martingale strategy works on the idea that you cannot lose forever. At one point, the luck will be on your side, and you’ll win. According to the strategy, if you keep doubling the amount you used, you will be able to make a profit and even cover any losses from before.
So, to use this strategy, you require some extra money, and you must be willing to double it in case you lose. You should also be brave enough to keep going for a while until you eventually win. At the same time, make sure that your life won’t be affected by the amount you might lose. In other words, it should be an extra sum that you have besides your regular income.
Once you set the amount you’re going to use, you apply the strategy by making a trade and waiting. There are two possible outcomes: the first one is that you win the trade, and the second one is that you lose it.
People get into the trade expecting the first outcome to happen. However, the second one occurs, and that’s how the person loses the trade. Then, he/she takes that amount and increases it by doubling it, and trades again, hoping that this time the first outcome will come.
So, let’s say that you are trading a fixed amount of $100. After waiting, outcome two happens instead of the first one. Then, you bring that amount to $200 and wait for the first outcome again. You lose once again, and double the amount of money one more time, taking it to $400. This keeps going until you eventually win the trade.
It’s essential to know that this whole process shouldn’t go on forever. Ideally, you should stop after the 5th time you lose and rethink your strategy a bit.
Why is the strategy so good in Forex trades?
In the Forex markets, the Martingale strategy is pretty popular. This is because currencies don’t usually drop to zero, which makes them different compared to stocks. Sure, it is possible for a company to file for bankruptcy, but countries do it by choice most of the time. The currency might decrease in value sometimes, but even then, the value of the currency usually never drops to zero. It’s very rare if it happens.
What’s more is that some traders might also be able to get interest, which then lets traders offset some of their losses using the income from interest. This makes the strategy truly attractive to traders who have capital.
So, if this applies, then the person doing the trades might want to use this strategy on currency pairs, and in the positive carry direction. As such, they would borrow with low-interest currencies and then purchase a currency that has a bigger interest.
What are the drawbacks?
Although it can be a great way to make some profit, the Martingale strategy is also pretty risky, and it comes with some disadvantages. These drawbacks are pretty much the reason why very few people consider using the strategy, to begin with. Experienced traders will know about these and proceed even though they know the risks.
If you are thinking of possibly using the strategy in the future, then here are some cons to keep in mind:
- The strategy doesn’t consider the transaction costs that every trade involves.
- Sometimes, at certain points, the stocks may stop trading.
- It may only take a few transactions until the amount you spend to trade can become extremely high.
- Trade sizes have limits placed on them by the exchange. So, even if you want to double a bet, you might not get enough chances to do so.
- There is simply a very high risk-to-reward ratio that this strategy involves, which is why it isn’t always the best option. When you use the strategy and end up losing, you keep spending more and more money until you eventually win, and sometimes you may not even win the trade. Furthermore, if you win, then the profit you make will be equal to the initial size of the bet.
- It’s possible that you run out of money in the middle of the strategy and then leave the trade, which can put you in a bad situation facing huge losses.
The Martingale strategy can work, but only if you know how to use it correctly and sensibly. It’s not the best option if you don’t have enough money to trade, especially if you’re not ready to possibly lose that amount and deal with it.
However, when you know what you’re doing, the strategy can help you generate profit and also cover the losses you previously experienced. All in all, this is a system for experienced traders. If you intend to use it, you should consider cybersecurity while trading from home, as well as the risks that come with this strategy.