The Martingale strategy is a famous money management approach that comes from the world of gambling. While it seems to be impeccable, it has a lot of inner risks that novice traders do not see when they start using it. By reading this article, you will learn more about Martingale, the history of this method, its basics, and how it may ruin your account.

Looking for a reliable broker for digital options and Forex trading? Join Binolla now and enjoy competitive conditions!

Key Takeaways

• The Martingale system was developed by mathematicians of the 18th century in France;
• The system has become popular in offline casinos of the past;
• With the emergence of online trading, some market participants tried to adopt Martingale for their trading sessions;
• The Martingale system seems to be perfect, but it has a lot of drawbacks, which prevent you from becoming a professional trader;
• Using Martingale in digital options is impossible. 

The History of the Martingale System

The Martingale system has been around for almost 300 years. It is believed to have been invented in the 18th century by mathematicians in France (the author is unknown) and became popular thanks to John Martindale who owned a casino in London at that time. He encouraged the visitors to double their bets after losses. By the end of the century, Charles de Ville Wells won over 1 million francs in the roulette game. Some say that he was using the Martingale system. 

Nowadays, the Martingale system is used sometimes by gamblers and bettors all over the world. Some casinos and sportsbooks protect themselves against this method by restricting players from using this approach in their rules, while others do not say a word against using the system believing that a gambler or bettor will end up losing money and the Martingale system will help them do it even in a quicker way.

When it comes to trading, Martingale’s history in this type of financial activity is short. None of the famous traders or investors of the past applied this method or described it in their works. After the rise of online trading and investments, some market participants paid attention to Martingale and even tried to adopt it to trading, but there is no live evidence of the effectiveness of this approach in trading or investment activities.

Martingale System Basics

The method known as Martingale is based on a simple principle of doubling the bet after the losing one. When it comes to trading, the approach works the same way. You double the amount of investment in digital options trading or the size of the position in trading CFDs after losing the previous trade.

The idea is to cover all the eventual losses by a single profitable trade. Let’s illustrate the concept with a simple example. Imagine that you want to buy a Higher contract for EUR/USD with a $1 investment. You buy it and lose your $1. The next time, you decide to buy a Higher contract again, but the investment amount should be $2 this time. If you lose a trade again, your next investment amount should be $4 already. In case of another loss, you will invest $8 to follow the Martingale streak. And you double your investment size until you profit. 

To calculate the Martingale sequence, you can use the following formula:

S = X + Y / K

• S – is the amount of the next trade size;
• X – the amount of the first trade size when the Martingale sequence was launched;
• Y – the sum of all previous trades;
• K – profitability percentage for the right market forecast.

When it comes to CFDs, the rules are the same, you place a trade and then if you lose, you double its size, while if you make a profit, you can start from the beginning. One important thing should be mentioned here. You should use the 1:1 risk/reward ratio at least to use the pure Martingale system, which means that if you put at risk $10 in your trade, then you should make at least $10 if you profit. 

For instance, you decide to buy EUR/USD and put at risk $10 in your first trade. If you lose, then you double your trading volume to $20. If you lose again, the next trade should be $40, and so on until you close a trade with a profit.

It sounds too good to be true so far. At some point, you make a profitable trade and cover your losses. However, there are some important nuances that you should consider before using this money management strategy. First, we are going to tell you about how to prepare yourself for martingale trading effectively.

Types of Martingale

There are three main types of Martingale that one can use in their trading sessions. They include.

Type of Martingale	Description
Classic Martingale	This method involves doubling the position size each time a loss occurs. The Martingale streak is completed after the first profitable trade.
Arithmetic sequence Martingale	Unlike the classic system, this one does no require you to double the size of the trade after each loss. You should add a certain percentage instead like 40%, 50%, etc. While the profit at the end of the sequence will be lower, the risks are also decreased.
Anti-Martingale	With this system, you increase your position size after a profitable trade and decrease it if losses occur.

Martingale System in Trading: Preparations

First of all, you should make sure that you have enough money for trading. Martingale requires huge investments as the size of a single trade will increase drastically during the streak. Other preparations for using the strategy include:

• Select the asset and the timeframe that you are going to use;
• Determine how much you will put at risk in your first trade;
• Place a buy or sell order according to your forecasts;
• Set a stop loss and take profit in order to meet the risk/reward ratio that you have set previously.

If you have a profitable trade, then you go back to your initial amount of investment and place the next trade of the same size. If it is a losing trade, then you double the position size to start the Martingale streak.

One of the most important benefits here is that you don’t need to make any market predictions at all. Similar to roulette or many other casino games, you simply place trades expecting that one profitable one in the future will cover it all. Here is how it works with CFDs. The risk/reward ratio will be 1:2, meaning that per risking $1, you can gain $2 if your trade is profitable.

*Number of  trade	Risk per trade	P/L
1 trade – loss	$1	-$1
2 trade – loss	$2	-$3
3 trade – loss	$4	-$7
4 trade – loss	$8	-$15
5 trade – loss	$16	-$31
6 trade – profit	$32	$64-$31=$33

Bingo, you made $33 in 6 trades, which makes this trading system look like a grail in trading. However, what you will read next will make you change your mind. However, first, let’s illustrate the pros and cons of using the Martingale trading system.

*The results of calculations are not exact due to the fact that Forex trading involves spread and commissions.

Benefits and Drawbacks of Using Martingale

The most important advantages of using Martingale in trading include:

• Simplicity. The Martingale system allows you to place trades without even resorting to technical analysis. Simply double your position size each time you lose money and wait for a profitable trade to cover your losses;
• Quick recovery. The idea behind this mathematical system is to recover all your previous losses by a single profitable trade. If you act according to the rules of the system, you will not only cover all your losses during the streak but also make some profits;
• Psychological comfort. This advantage allows market participants to stay in control of their future trades. They know that at some point they will profit and gain their losses back. However, this benefit is deceptive as there is no guarantee that you will have enough money during the streak to continue it.

When it comes to the drawbacks of the Martingale system, they are the following:

• Exponential losses. Each time you have a loss, you will have to double your position size. Some traders may feel uncomfortable with this as they will have to put at risk amounts that they are not used to trade with;
• Large capitals are required. To trade with the Martingale system, you need to invest a lot of money to maintain the streak in any case;
• False sense of reliability. While you may feel comfortable with Martingale, the truth is that you increase your overall risk exponentially during the trading session, which may result in heavy losses if you are unable to maintain the streak. Some traders cut the streak on their own as they are unable to see more and more volumes involved in trading.

Why Is It Not Recommended to Use the Martingale System in Trading?

You may think that the Martingale system is something that may make you rich over time so far. However, the truth is that it will rather deplete your trading balance instead of making you another George Soros or Warren Buffett. While on the surface it may sound like a good plan, as you will recover your losses and make profits with a single trade, when delving deeper into this system, you will see all its ugly nature.

First, you need to have a lot of money on your balance and be ready for risks that you can’t even imagine. Even a streak of 5-6 losing trades may eat up a significant part of your balance. Therefore, if you decide to use Martingale, you should be ready to invest a lot of money. 

Some new traders may think that adding technical analysis strategies to their trading sessions will improve the situation. In some cases they are right. However, even the best strategies won’t guarantee that at some moments a trader will have a losing streak. Moreover, most use Martingale trading short-term, which means that the probability of mistakes increases significantly.

The next reason to avoid Martingale is that this system turns trading into betting or gambling. When setting up their mindset, a trader thinks about mitigating risks and maximizing profits. However, Martingale has nothing in common with it. By doubling your position size, you will break the basic money management rules that recommend not to put at risk more than 1-2% of your balance in each trade. If you have deposited $100 and at some point in the losing streak your position size reaches $60, then your risks will be 60% of your balance. 

What makes it even worse is that the whole trading mindset is broken. Professional traders often take time before engaging in the next trade. This helps them calm down and make reasonable decisions based on their market vision and not on their emotions to win back what they have lost in the previous trade. When trading with Martingale, a trader opens the next position right away as they need to close at least one profitable trade to cover losses.

Digital Options and Martingale: Why Do Traders Can’t Use Classic Martingale?

Doubling your trading position size will not work when it comes to digital options trading. This is due to the fact that your eventual profits are always less than 100% of your investment. Therefore, even after you profit, you can’t even cover your losses. To make it even more clear, let’s check an example of trading using the Martingale system with an asset having a 90% profitability.

Trade	Investment	P/L
1 trade – loss	$1	-$1
2 trade – loss	$2	-$3
3 trade – loss	$4	-$7
4 trade – loss	$8	-$15
5 trade – loss	$16	-$31
6 trade – profit	$32	$32*0.9=28.8-$31=-$2.2

As you can see, your balance after a 6-trade streak is still negative. This is due to the fact that in digital options your gains are less than 100% of your investment amount. The only positive thing here is that you cover part of your losses. However, you don’t start trading digital options simply to create losses and then cover them partially. The main goal of a trader is to profit.

The Anti-Martingale System

Unlike classic Martingale, which is based on doubling your position size after a loss, the Anti-Martingale system is about cutting your investment amount after a loss and increasing it after a profitable trade. This approach is used by many traders as it does not contradict the basic money management rules.

Imagine that you have bought a Higher contract by investing $1 when having $100 on your balance. You have lost this $1 and the next time, you open a trade with $0.99. This is a reliable tactic allowing you to maintain the balance between your balance and your investment amount. If your trade were profitable, you add to your next position, by opening a trade with $1.009, instead of $1 as your balance has increased. 

Conclusion

The Martingale system was developed by mathematicians in the 18th century and was first applied to gambling and betting. With the emergency of online trading, some traders tried to apply it for trading as well. However, this approach has a lot of drawbacks as it increases your risks significantly and may lead to heavy losses. While the system works for Forex trading, one should have an enormous balance in order to succeed. For those who trade with $100 or even $1,000, the chances of losing are extremely high.

FAQ

Does the Martingale System Work in Trading?

Yes, the Martingale system works in CFD trading, but traders should have an unlimited balance in order to make sure that they will profit after a long losing streak. When it comes to digital options, the Martingale system does not work as payouts are below 100%.

Is Martingale a Good Strategy?

While Martingale may seem an impeccable strategy, it has a lot of drawbacks. You may lose significant amounts of money trying to continue the losing streak and recover from losses.

Should I Use the Martingale Strategy in My Trading Sessions?

While it is not prohibited to use Martingale in trading, you should think twice before launching your first streak. Traders may lose a lot of money and even end up having no money on their balances when trading with Martingale.

Martingale vs Anti-Martingale: Which One is better?

When comparing both, Anti-Martingale is better as it does not impose strict position sizing and allows you to place trades that meet your current trading balance status.