The Martingale System of Money management can be defined as a system of investing in which the values of dollars show a continuous increase even when there are losses or the rise in the position size with lowering portfolio size.
This system works on the principle realized by the doubling of the bet each time the trader loses (which infers the fact that a 100% bet win/loss each time) and thus, the trader recovers a previous loss and will also gain the first bet amount. So if the trader acquires indefinite amount of wealth, this system will offer him immeasurable amount of bets which corresponds to probability 1 each time. The problem is that no trader possesses an infinite wealth and thus utilizing this strategy eventually leads to a wiped account.
How to Trade using Martingale System?
- This system extends flexibility while choosing currency and time duration, as any currency pair and timeframe will work.
- The trader is required to determine his basic position size.
- When dealing with the options, the trader needs to place an order in a random direction (Buy or Sell) accompanied by some fixed stop-loss and also the same take-profit.
- And if the SL or TP is triggered the trader may either win or lose.
- If the trader wins, he is required to acquire an order by setting the position size to the initial point.
- On the other hand, if the trader encounters a loss, he needs to double the position size and again place an order.
- If the trader is someone who acquires infinite trading account balance, he may eventually win a lot. Similarly, if his account balance is limited he may end up incurring losses.
Hence the Martingale system is one such gamble that generates results which are completely independent of the previous results. Hence, one can expect a stream of losses when he indulges in this system. In Forex the probabilities are not linear, so the streaks can have some inner logic dependent on markets. Thus one cannot easily predict the potential market performance and thus the profits generated due to optimized market conditions.
There are two broad types of martingale systems used in the forex market:
- The standard martingale – betting on ranging or trend correcting market;
- The reverse martingale – betting on trending or volatile market;
If a trader opts to trade using Martingale system of trading, it needs to be backed by careful analysis of real-world trading which can be ascertained by the trade permit if the trader moves into a negative territory. Some factors to consider when doing this analysis is to figure out the total range between the high prices and low prices for the time period that will be used to construct a Martingale Strategy.