What is a martingale trading strategy?
What is a martingale trading strategy? I think those of you who have experience in forex trading certainly already know this strategy, or at least have heard of it.
Martingale trading strategy is a way of trading by doubling the size of trading positions each time we get a loss in the hope that it will be able to cover the previous loss with just one position.
A very extreme way, because it requires a very large capital to be able to carry out this strategy perfectly.
Some or even many traders say that with this martingale strategy they will fail sooner or later.
Well, we will try to review one by one the advantages and disadvantages of using this strategy.
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History of martingale
Before becoming popular in stock and forex trading, martingale was a strategy used in betting gambling.
This trading strategy uses the basis of probability theory developed by Paul Pierre Levy, Joseph Leo Doob, as well as several other mathematicians from one of the popular gambling styles that were popular in France in the 18th century.
The basic theory of betting style is to double the bet every time you lose.
So you can immediately cover all losses and get a profit even though you only get one win after losing a few times.
To make it easier to understand how Martingale in betting gambling works, we will use a simple example.
Assume you are at the casino and make a roulette bet, with “head” and “tail” as bets.
You have 10 $ and first place a 1 $ bet by placing it on the head.
Even though there are two head and tail options, you still choose the head option regardless of the head or tail outcome.
- If your first touch position wins because the flip outcome is head, your money now becomes 11 $.
- Your second bet remains with $ 1 to bet, and it turns out that your second bet loses because the flip outcome is the tail.
- Now your money is 10 $.
- The third wager you put 2 $ on the bet, and it turns out you are again losing because the flip outcome is the tail.
- Your money now is 8 $ because you lost 2 $.
- Your fourth bet multiplies to 4 $, and it turns out that on the fourth bet you get a win because the result of the flip-out is head.
- Now your money has increased to 12 $
The maximum risk of martingale
However, if all bets are always lost then you will only do four times to wager.
The calculation is
- First, you bet 1$ and lose, your money becomes 9$.
- The second bet you wager with 2$ and loses, your money is now 7$.
- Your third bet is a wager with 4$ and loses, your money becomes 3$.
- Your fourth bet cannot double the bet because there is only 3$ left, if you bet 3$ and lose, your money will be zero.
Can martingale works in forex?
Forex trading is a type of investment with speculation, but traders must be smart in how they approach the market and implement strategies to win trades.
Can Martingale work in Forex? maybe the most accurate answer is, yes this works for forex, but the risk is also high, even higher.
Because every time you get a loss, you will open a new order use double the lot size, and this will automatically increase the used margin, which means it will decrease the margin level.
If the margin level gets lower, then it will approach the margin call level.
And if it turns out that the price is always against your position, it can trigger an account to stop out.
This means your broker will force you to close your position automatically.
And you will only see your balance remaining only a few cents, maybe even you encounter a negative balance.
To apply a martingale trading strategy to forex, you must have some special requirements.
- First, you have to be strong psychologically, facing a large floating loss might make a heartbeat faster for some traders, especially newbies.
- You must have an accurate mathematical calculation in implementing this strategy.
- You need a large amount of capital if you use this strategy, and high leverage is recommended.
- Having a good understanding of market trends, the recommended conditions are sideways or ranging trends.
If you are ready with all the risks of using this martingale strategy, you can try to use this extreme strategy to try to get profit from forex trading.
But you can’t cry if you lose money by using this Martingale strategy.
It is recommended to only use money that is ready to lose because if a long-term trend is always against your position it will quickly cause a margin call and even a stop out account.
Or start with minimum lot size like 0.01 lot.
How to martingale forex?
Although the martingale trading strategy is an extreme trading strategy.
But there are still many traders who are curious about the performance of this strategy.
They think and trying about how to make this martingale strategy as a safe strategy.
But if you try to use the Martingale trading strategy manually.
It might be a bit difficult to quickly calculate the target profit, and stop-loss, so you can open new orders quickly after price hit a stop loss.
You have to practice intensely if you use manual strategies.
But if you are good at creating EA, or expert advisors for automatic trading, you can enter logic parameters to create a martingale robot.
Martingale trading strategy concept
In principle, the martingale trading strategy is that we pay for mistakes by doubling the position size.
Whether it is with pure martingale, or with hedging martingale.
Pure martingale means that you open the same position from the first loss position.
if you buy after hit stop loss you will buy again.
Hedging martingale is that you open an opposite position from the first open loss.
Or you can say this is switching, but with double position size.
Indeed, by doubling the size of this position the risk will be even greater because this automatically reduces the margin level.
So, for example, the first position you open 1 lot and loss of 50 pips,.
To recover the loss then you open with the position size of 2 lots.
So to reach break-even as recovery a loss of 50 pips you need to profit at least 25 pips, so the calculation is 2 x 25 = 50.
But if you profit 30 pips then it has already earned a profit by calculation, 2 x 30 = 60, so the profit is obtained 60 – 50 = 10 pips.
Martingale strategy in forex
Now we will try to simulate a trade with martingale assuming 4 times get a loss of 50 pips each by using a lot size multiplier, and in the fifth position eventually get profit.
- Level 1 position with 1 lot x 50 = -50 (loss)
- Level 2 with 2 lots x 50 = -100 (loss)
- Then level 3 with 4 lots x 50 = -200 (loss)
- Level 4 with 8 lots x 50 = – 400 (loss)
- Level 5 with 16 lots x 50 = 800 (profit)
If we calculate the accumulated loss of all these transactions is 50 + 100 + 200 + 400 = 750
And the last position of step 5 with a profit of 800 pips, the final profit is 800-750 = 50 pips
Four times the loss in a row covered by one of our winning trades have even made a profit of 50 pips.
But what is the total margin needed to be able to do martingale up to 5 steps?
We simply need to count numbers from the results of the trade-in each step means from level 1 to level 5.
50 + 100 + 200 + 400 + 800 = 1550
From the calculation results are multiplied by 2, the result is 3100.
This means that traders must prepare capital that is able to hold up to 3100 pips.
If you use a mini account with a value per pip is 1$ then the capital is 3100 $ to implement the 5-step method.
If you use a standard account with a value of pip $ 10 you need at least $ 31,000.
But to reduce the capital ratio, you can use a micro account if the broker provides this type of account.
Or start step with the smallest position size 0.01 lot.
The application of martingale in forex trading
Maybe you think this will be difficult to apply in trading, but you can try to understand the example of the application in EURUSD pairs.
Take a look at the table image below.
From the image table above we can see that if we use 2 lot position sizes.
To reach the break-even point we need a profit of 10 pips.
In the example above since entry at 1.2630.
And just waiting for a hit until the price is 1.2640 to reach the break-even point.
If you add 4 lot sizes then you need to reach the target of 15 pips to reach the break-even point.
In the example of EURUSD entry at 1.2610, you only need to reach the target of 1.2625 and not at 1.2640.
In this example step Marti when you get a loss of 20 pips it will accumulate previous losses.
If before the last step, you win, you can repeat the first step.
But if it turns out that until the last step you are still losing, and your funds cannot open new positions again then you will only rely on luck.
Forex martingale strategy that works
Many developers have conducted various trials by modifying martingale ea to get the best settings.
There may have been hundreds of EAs working on a martingale basis, but many have fallen and ended up with a margin call.
Then what about the martingale strategy that works, this is still a matter of research by Marti lovers.
Maybe there is no definitive answer to this question because Martingale always doubles the position in the sequence of loss.
If the trend is always against the position, you will not have enough funds to open a new position.
So we will conclude that the Forex Martingale strategy that works is to have several points:
- It is to a maximum drawdown if the maximum drawdown is reached the position must be closed and started to recycle again.
- It will work better in ranging market conditions and away from the trending market conditions.
- Having a large capital will certainly be much better.
- Calculate the distance of each Marti step.
- Brokers with lower spreads and no swaps are better.
Forex trading martingale pros and cons
Using a martingale trading strategy has indeed become an extreme strategy in forex, but it still has pros and cons in its application.
- Martingale does not require complicated analysis because it only opens one position in the same direction, if buy, then step two also buy.
- Trading rules are easy to understand because they always double the position size in the next step.
- If applied correctly it will provide a large profit.
- Using static calculations so that the profit loss outcome can be measured easily.
- He needs a large capital.
- Martingale does not increase winning trades but only to delay loss if you are lucky.
- The higher the risk because it doubles the size of the position.
- Very vulnerable to fatal losses when they are no longer enough to open new positions.
- It relies on trend reversals, but irrationally, while trends are very dynamic.
If you are a trader who likes challenging strategies, a martingale is one strategy that is worth trying.
But if you are a trader who prefers low-risk trading, this does not suit your soul style, this will only make your emotions explode if you see a large floating loss.
Meanwhile, experience in determining or analyzing market trends in ranging or trending conditions is also an important point for the success of this strategy.
If you are interested but not ready, take advantage of a demo account to try this strategy, or better if you try to use EA so that it will run automatically.