The martingale strategy has been popular among gamble players since the 18th century. The main idea behind this betting strategy lies in the constant increase of bets after each loss. In such a way, all previous losses are easily covered by one gain. The bet size becomes minimal as soon as the player wins. This strategy works perfectly in games such as “heads or tails” and “more or less” with the payouts of more than 2 to 1 (if the payout is 2:1, one gain will cover all losses, but no more). Is this approach applicable for currency trading?
To put it simple, the exchange rate can go either up or down. In other words, if you limit the order by clear stops and profits, then the differences from such games becomes minimal. Instead of the bet size, the value of order is increasing. Thus, trading ceases to depend on analytics, news releases, and other events that have an impact on pricing.
However, despite its simplicity, the method has some drawbacks. The first problem is the balance: it must be large enough to withstand more than 5 (at least!) consecutive increases in the volume of orders. What is more, every dealing center applies the automatic stop in case the size of the deposit decreases to 10% of the initial amount.
Secondly, upward or downward movements of the currency rate must be considered. The probability of falling heads or tails with an infinite number of games tends to be ½. However, in trading amid a distinct downtrend, for example, it will hardly be possible to close all 10 buy orders with a profit. At most, only 1-2 out of 10 orders will be profitable.
In addition, if instead of increasing the volume of orders, you place the take profit higher, or increase it along with the volumes, the probability of losses also increases since the stop-loss is triggered. Despite all the rules of the money management, you will need to keep the stop/profit ratio at 1: 1. Otherwise, a winning deal can take months to complete.
Finally, the psychological factor should be mentioned. When you accumulate the critical balance (the sum on the balance which allows trading with large volumes and can lead to major losses in the event of a losing trade), it can be very hard to control emotions. That is why it is very difficult to start with the minimum order value when you see another loss happening.
As you can see, the martingale method does not work well as a main strategy. Still, the martingale is a great option that helps follow the progressive increase in the orders’ value. Later we will discuss how to use this method correctly when trading on Forex.