Having a money management strategy is an essential factor in trading. It should be designed so that you are able to work on consistent profit. This can be done when you win more than you lose. Losses will happen. You can be sure of that. More important is that you lose as little as possible and your winning trades offset the losing ones. In today’s article, we will look into Martingale Money Management for options trading at Pocket Option. Let’s see how it works.
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Martingale Money Management
What is your reaction when you think about losing a trade? Do you think you should put less money on the next transaction? This is a very popular approach but is it the best?
Martingale Money Management suggests something completely different. Whenever you experience a loss, you should invest a multiplied amount in the next trade. When this transaction also fails, you multiply the amount again. Repeat this process until you win. This allows covering the losses because in a winning trade you have invested much more so you have also won much more. However, after the winning transaction, you should start over with a small amount.
Martingale strategy and options trading
Martingale money management proposes a unique approach to trading. Does it work in options trading well?
When you open a position, you have a 50% chance of winning and 50% of losing. The losing streak may last some time but it will eventually end. With every new transaction that fails, the chances that the next one will be the winning one increase.
Psychologically the Martingale strategy may be very difficult for traders. Losing money is not a nice sensation. Traders may feel uncomfortable investing more and more after a loss. They may experience fear and anxiety.
Using this strategy require you have a certain amount of money in the account. You need to increase investments and it may lead sometimes to a huge loss. The winning trade should offset this loss, yet, you must be prepared for different scenarios. A losing streak cannot last forever, however, it can last so long that the sum in your account slowly vanishes.
Being able to keep money in the account is the first rule of trading. Your goal is to gain money. So you have to protect your capital in order to open new transactions. In Martingale management you may face the situation when you should put all the capital in a single trade. This is quite risky as the market often behaves in an unpredictable way. Economic news and other events influence the price level. The trend may change within seconds.
How to use Martingale strategy effectively
The Martingale system should be applied with caution. You can determine the amount you will invest in one trading cycle in advance. Instead of disposing of all the capital, you may for example decide to use $200 only. Begin with an investment of $50. If you win, it is all good. If you lose even a few times, you will be $200 less and the rest of your money will be safe.
Price moves in cycles. You want to take advantage of it and try to predict its future direction. Decide that you will open, for instance, 3 transactions in the cycle. You may also spread it out over the day. The first transaction you open in the morning to test the market. The second, afternoon trade will confirm your predictions and the third position you will open in the evening. Such an approach gives you time for analysis and offers an opportunity to test the market with small amounts. When the time to invest a bigger sum comes, your decision may be more accurate.
Final words
Martingale Money Management is a quite risky approach. It requires investing an increasing amount every time you lose. After the winning trade, you start from the small sum again. The assumption is that the winning transaction should be able to offset the losses.
No one can guarantee how long a losing streak may last. The market goes up and down and it is not always possible to predict the direction of the price properly.
Never put all your money in a single trade. Take a break when you feel the emotions take control of your decisions. Be cautious and conduct a deep market analysis every time you open a position.
Wish you good trading results!
Risk Warning: The trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. You should never trade money that you cannot afford to lose.