Martingale is one strategy that can be done when stating that someone should increase the size of the trade if they win. To find out more about this martingale, you can read the article below. In addition, you can also read other articles such as How to Read and Trading Strategy Golden Cross Pattern.

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What Is Martingale Strategy

The Martingale strategy involves doubling the trade size every time a loss is encountered. The classic scenario for this strategy is to try and trade an outcome with a 50% probability of occurring. The scenario is also called the zero expectation scenario.

For situations with equal probability, such as a coin toss, there are two perspectives on how to size a trade. The Martingale strategy states that one should double the size if one loses. The theory behind this strategy is that you get back whatever you lost. Similarly, the Anti-Martingale strategy states that one should increase the size of a trade if one wins.

Martingale Example

To understand the topic better, consider a trade with two equally probable outcomes, Outcome 1 and Outcome 2. Trader X decides to trade a fixed amount of $50, expecting Outcome 1 to occur. However, Outcome 2 occurs instead, and the trade is lost. Using the Martingale Strategy, the trade size is increased to $100, again expecting Outcome 1. Once again, Outcome B occurs, and $100 is lost. Due to the loss, the trade is doubled and is now $200. The process continues until the desired outcome is achieved. As you can see, the size of the winning trade will exceed the combined losses of all previous trades. The difference is the size of the original trade size.

Example

Some possible sequences of the above examples:
  • Win the first trade and make a profit of $50
  • Losing the first trade and winning the second trade:
– Lose $50 on the first trade and win $100 on the second trade. You are left with a net profit of $50.
  • Lost the first two trades and won the third trade:
– You lose $50 on the first trade, $100 on the second trade, and then win $200 on the third trade. This gives you another $50 profit.
  • Losing the first three trades, but then winning the fourth trade:
– You lose $50 on the first trade, $100 on the second trade, and then $200 on the third trade. However, you win $400 on the fourth trade. Again, you make a profit of $50.

How to Use the Martingale Technique

To be fair, the Martingale trading strategy is not very popular in the financial markets. Indeed, only a few experienced professionals use it to trade. That is because, as mentioned, it requires a lot of money due to the possibility of unlimited losses. Here is how you can use the Martingale strategy in forex trading. First, you must have an original trading strategy. This can be a hedging, algorithmic, and breakout strategy. Second, you must then conduct an analysis and identify potential entry and exit positions.
We recommend that you use small lot sizes and low leverage when using the Martingale strategy. Third, you should open a trade and set your take profit and stop loss. Then, you should wait for the results of the trade. If you lose money, you should double the trade size and wait. You should then continue this strategy until you make money.
 
The Martingale strategy is usually used in any game with the same probability of winning or losing. It is important to understand that the market is not a zero-sum game. The market is not as simple as betting on a roulette table. Therefore, the strategy is usually modified before being applied to the stock market.
 
Consider the following example. A trader uses the Martingale Strategy and makes a $10,000 purchase of a company's stock when it is trading at $100. Assuming that the stock price drops in the next few days and the trader makes a new purchase of $20,000 at $50, the average goes up to $60 per share. Suppose the stock price drops further, the trader makes another $40,000 purchase at $25.
 
The average cost per share comes to $33.33. At this point, according to the strategy, the trader can successfully exit the trade and make a profit equal to the initial bet size of $38.10. The trader then waits for the stock to move to $38.10 and makes a profit of $10,000, which is the initial bet size. In the above case, the trader can exit after the third bet because the stock price reaches $38.10. That is not always the case, and the trade size can reach very high amounts if the stock price falls for a long period of time. In the hope of recovery, a lot of money is risked using the strategy.

Weaknesses of the Martingale Strategy

Despite masquerading as a mathematically sound trading strategy, the reality is that the potential risks of the martingale far outweigh the potential rewards. Here’s why:
  1. You will need an unlimited amount of capital, which, realistically, is not something that the average trader (or perhaps even the best trader in the world) has access to. You may run out of funds before the market turns in your favor. You will then be forced to exit the trade at a huge loss.
  2. The martingale strategy relies on the binary version of equal probability. However, in stock or forex trading, the odds of each trade are influenced by many factors. Thus, they never quite meet the ideal setup for martingale trading.
  3. There is also the potential for major problems when trading with leverage. Even small price movements against your position can result in large losses. In such cases, your entire trading account can be wiped out after three or four consecutive losses.
  4. Spending increasing amounts of your trading capital to achieve the same profit as your initial position does not make sense. To realize a reasonable profit, your initial position size must be large. However, that means the amount you “double” will be very large as well.
  5. The strategy does not take into account the transaction costs that come with each trade made. This means you lose more every time you double up.
  6. Your trading platform may limit the number of times you can trade, as well as the size of the trade. This means that traders do not have an unlimited number of opportunities to double their positions. If the market does not favor them within the limited opportunities set by the platform, then they have incurred a large loss with no chance of recovery, let alone profit.
  7. The amount spent on trading can reach huge proportions after just a few transactions.
  8. If a trader runs out of funds and exits a trade while using a strategy, the losses incurred can be disastrous.
  9. It is possible that the stock stops trading at some point in time.
  10. The risk to reward ratio of the Martingale Strategy is unreasonable. When using the strategy, a higher amount is spent with each loss until a win, and the final profit is only equal to the initial bet size.
  11. This strategy ignores the transaction costs associated with each trade.
  12. There are limits placed by the exchange on the size of the trade. Therefore, a trader does not receive an unlimited number of opportunities to double the bet.
After learning about this martingale along with examples, how the techniques and weaknesses are, then you can start trading forex at GIC by registering and depositing a minimum of IDR 150,000 and downloading the GICTrade application on the Play Store or App Store.