Many people who lack the understanding of how financial markets work believe that trading is gambling. While the opposite is true, in gambling, the house always wins. In other words, the more you gamble, the more you’ll lose. Professional traders use techniques and strategies that give them a trading edge. Opposed to gambling, the more professional traders trade, the more money they make.
When choosing a trading strategy, it’s important to pick the one that is profitable and fits your personality the best. One of the well known strategies is called a Martingale forex strategy. Let’s find out how this strategy works and what are its advantages and disadvantages.
Core features of Martingale strategy
- Ideal for currency pairs: High volatility pairs
- Ideal chart time frame: Between 15M and 1H
- Required time per day: Depends on trading strategy
- Required indicators: No indicators are needed for the martingale strategy
- Possible drawdown: Drawdown is selected by the trader and each unsuccessful trade is 100% drawdown
- Recommended trade size: Trade size doubles after every unsuccessful trade
- Recommended trading platform: MetaTrader 5
How does the martingale strategy work?
When trading currency pairs, you are never guaranteed that your next trade will be successful. Losing is a part of the process. Successful traders use strategies that enable them to cover losses using winning trades and produce profits.
Martingale strategy for FX is based on the idea of increasing risks following every unsuccessful trade to cover the total losses while leaving a small profit. The strategy guarantees profits for traders that have deep pockets.
This is a risky strategy that can bankrupt a person in a blink of an eye when a series of losses take place. In trading, it is pretty common for traders to have a series of losses and series of winning trades.
Before people started adopting the martingale strategy for FX trading, it was originally very popular among gamblers. The idea behind this strategy is that, after every unsuccessful bet, you should double your bet until you win one bet. With this strategy, it was guaranteed that you would walk out of a gambling house with profits. Let’s take a look at the Martingale strategy example in gambling: Let’s say you bet a dollar on roulette that offers 50% winning chance (in fact roulettes have 18 reds, 18 blacks and 2 zeros) and loose, the next bet needs to be 2 dollars. If you win, you will cover the previous loss and have 1 dollars in profit. If you lose the second bet, you are now 3 dollars in minus. In order to cover the losses your next bet needs to be 4 dollars. What’s more, it’s important to choose certain bets such as blacks or reds every time. At the end of the day, if the series of losses are too great, your risks can become huge. Consequently, you will be taking much greater risks than there’s potential rewards.
When it comes to using Martingale strategy in Forex, things are a bit different. Martingale strategy in FX can be used in two ways. Traders can increase their position sizes after losing trades or increase stop loss and take profit targets, that will increase the distance but also risks and potential rewards. The strategy has many pros and many serious drawbacks that need to be discussed.
Pros and Cons of Martingale strategy
Finding a safe martingale strategy is not possible as the strategy is inherently risky. For taking small profits, taking huge risks is not a good way to approach trading. Traders often blow up their accounts when using Martingale Forex strategy. Let’s take a look at the pros and cons.
- It is one of the easiest strategies to use, as you don’t need to know or learn anything as you are just doubling your initial investment/bet.
- Just one successful trade is enough to compensate for previous losses and make a profit
- Martingale strategy is easy to automate into trading algorithms
- When using the martingale strategy in Forex, chances of blowing up the trading account increases
- Requires an unimaginable amount of funds, for it to be a successful strategy
- Can trigger human emotions and cause revenge trading
Example of Martingale strategy in trading
Let’s take a look at the Martingale strategy example in Forex. In Forex, currencies are valued against other currencies that makes the prices cyclical. Currencies are backed by nations and governments. When it comes to stocks, companies are not as strongly backed and their prices can drop to zero or rise without limit.
In this example, let’s say that we have predicted a reversal. Let’s also assume that all of the trades above have 1:1 risk to reward ratios. First attempt resulted in losing 1 USD. On the second try, we increased the position and risked 2 USD. The result was a loss once more. After the second loss, we were 3 USD in minus. In order to cover the losses and still receive profits, the third order had a 4 USD Stop Loss target.
To cover the total losses that are 7 USD, our fourth Stop Loss and Take Profit targets were the size of 8 USD. The last trade resulted in profits. If we start another trading round using the Martingale FX strategy, we will be starting from risking 1 USD again. Keep in mind that the strategy is intended to work if you are trading the same direction. When we placed a short order and lost, the next order could not have been long.
FAQs regarding Martingale trading strategy
Does Martingale strategy work in Forex?
Martingale strategy is highly risky. It works in theory, however, in practice, it is dangerous and can result in blown accounts. Professional traders avoid using the Martingale strategy in Forex.
Is Martingale a good strategy for FX traders?
No, Martingale strategy in FX increases risks and can result in high losses. What’s more, the strategy can cause emotional trading after a few losses that may happen in series. The main disadvantage of using the strategy is that it ignores the risks and at the end of the day, you will be taking huge risks for a portion of profits.
Why Martingale strategy works better in Forex than Stocks?
Martingale strategy is considered a better option for Forex than Stock because stocks can drop to zero. Whereas Forex market have a more cyclical nature. However, in both cases, the strategy is very dangerous.