Strategies Based on the Martingale System aka The Threat for Traders called Martingale
It’s not important if the trader is a newbie or an experienced professional. The term “Martingale” and the main topic of this article may be known to different people from different industries where this money management system found its place.
Besides the fact that this is a very controversial and risky system in trading, a number of traders based their strategies and automatic trading systems thereon. In a worse case, they trade as if they used Martingale, not being aware thereof.
And why do they use this system? The most frequent reason is the fact that they believe that Martingale increases the profitability potential.
Let’s take a look now on this strategy and demonstrate what’s the profitability of Martingale like in real.
What is Martingale and its beginning
The Martingale system was developed in the gambling industry, where it was intended to improve the chance for winning, thus moving the advantage to the side of player (as the time went on, it was proven that it does not work like that). This is a very simple system, where in case of “zero” sum games (roulette, betting on top/back of the coin, etc.), always a double of the previous bet is risked if the player loses.
Similar strategies, based on this system, may be used e.g. in trading as well.
Use of Martingale in Forex
While in the case of gambling, the gambler either loses his bet or wins, in the case of forex trading, it‘s different. Here, the trader opens a position at a certain price level. However, we should emphasize that in case of loss position, at forex market it’s not closed – you may open another trade without any problem and leave the one in losses still open. Thus, the trader may achieve the profit even sooner, thanks to Martingale and opening of positions at other price levels, if the price returns back to the opening position.
It looks great, right?
However, the reality is a little different. The Martingale system was the one responsible for a number of ruined accounts at Forex.
Let’s imagine that over time, the trader using the Martingale system finds a strong trend moving against expected market development. In such case, the trader does not see the increasing loss in a linear way with additional open positions, but exponentially, what’s the reason why the pure Martingale system is unsustainable from a long-term perspective for traders!
A demonstrative example of the use of the Martingale system for 5 and 10 positions with a range of 50 pips at the EUR/USD pair can be seen at the table below.
When checking the table above, it should be clear that the increasing volume that should secure long-term sustainability is a weapon of mass destruction as a result.
Therefore, the traders often try to limit the losses either by a method when they close their positions completely in case of achieving a certain number of open positions, or in case of adverse development, they do not open additional new positions. Unfortunately, as time proved, not even these alternatives and capital protection methods provide long-term and continuous profitability to traders.
It’s important to mention that Martingale is only a money management system. Each new open position does not provide any advantage in the market. You only increase the risk, thus potentially accelerating the decrease or zeroing of loss from the currently open positions.
Naturally, from the theoretical point of view, the Martingale system is ideal, as once, the profitable trade will come probably. However, the issue is that there’s no trader that would have the certainty of a maximum number of trades in a loss, so sooner or later, there’ll be a loss that will ruin the Martingale strategy for sure.
At the same time, the traders that did not know the Martingale system before, but they recognized their own style of trading in it when they are trying to buy more into the already existing positions in a loss, will probably realize that this is not a long-term sustainable method of trading.
If you would like to try forex trading for free and free of any risk, don’t hesitate and try it out on our demo account that may be opened on our website here: www.purple-trading.com
About the Author
Team Purple Trading
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