Martingale Systems are a class of betting systems that were very popular in France in the18th Century. An example of a very simple Martingale system would be one designed for a game of heads and tails, the strategy involves a gambler doubling his bet after every loss so that he recovers all of his previous losses and makes a profit equivalent to the original stake. Martingale systems have also been devised for Roulette involving a player betting on either Red or Black (0 and 00 was introduced to roulette in order to protect the house). A gambler who has infinite wealth will eventually predict the correct result of the coin toss guaranteeing the gambler a profit. Of course no one has infinite wealth and unlucky gamblers will eventually go bankrupt using such a system. However it is quite possible to have a run of results that will go in your favor as featured in the following example:
| Lucky Run Head vs. Tails Martingale System |
|
|
|
|
| Heads or Tails |
Bet Size |
Result |
Profit/Loss |
Balance |
| Tails |
10 |
Tails |
10 |
110 |
| Tails |
10 |
Heads |
-10 |
100 |
| Tails |
20 |
Heads |
-20 |
80 |
| Tails |
40 |
Tails |
40 |
120 |
However it only takes a small run of result to go against one in order for the gambler to go bankrupt. In the following example our gambler begins by only risking 10% of his available balance but is wiped by a run of four consecutive bad results. While many may think four wrong predicts in row is quite unlikely, the odds of such an event are only around 1 in 16.
| Unlucky Run Head vs. Tails Martingale System |
|
|
|
|
| Heads or Tails |
Bet Size |
Result |
Profit/Loss |
Balance |
| Tails |
10 |
Heads |
-10 |
90 |
| Tails |
20 |
Heads |
-20 |
70 |
| Tails |
40 |
Heads |
-40 |
30 |
| Tails |
30 |
Heads |
-30 |
0 |
Martingale Systems & Forex
Many have applied Martingale systems to Forex and one will find plenty of different Martingale systems available online. When applied to Forex trading the Martingale faces a number of different advantages and disadvantages. Firstly, trends in Forex are more like to continue for an extended period of time which can lead to a trader using a Martingale system going broke very quickly. However when applied to Forex trading their is also the advantage that every time you double down (on a buy trade) you lower your average entry value. Meaning that each time you double down you need the currency to rally less to reach a break even. However, you need very deep pockets to be able to trade such a system. Supposing you have a balance of $5,000 you can go bust very quickly even if you begin trading a single lot.
| EUR/USD |
Lots |
Break Even Price |
Accumlated Loss |
Pips Needed |
| 1.2650 |
1 |
1.265 |
$0 |
0 pips |
| 1.263 |
2 |
1.264 |
-$200 |
+10 pips |
| 1.261 |
4 |
1.2625 |
-$600 |
+15 pips |
| 1.259 |
8 |
1.2605 |
-$1,400 |
+17 pips |
| 1.257 |
16 |
1.2588 |
-$3,000 |
+18 pips |
| 1.255 |
32 |
1.2569 |
-$6,200 |
+19 pips |
Even if the market does eventually turn in your favor, you may not have the funds to take advantage of the up turn as you have already been forced out of the market, by a serious of unfortunate trades.
Why Martingale Systems are probably a bad idea
While on the face of it a Martingale system may appear attractive as it appears to be simple and effective (provided you have a very large bank balance), it should be noted that it is only likely to be a winning strategy in the very long run provided you have an infinite bank balance. You will encounter a number of traders especially on social trading websites using Martingale systems in order to gain followers and earn large commissions. Eventually these systems blow up though the trader using them has made more money from the social trading commissions than they lost in the account using the Martingale system. You will also find a number of people selling Expert Advisors and automated trading software based on Martingale principles. Which is one reason why you should be careful when using trading systems you didn’t design yourself.
