When it comes to strategies used in trading, there are practically a plethora of options. Trading strategies enable a trader to determine points and levels of opportunities in a chart. It can also help a trader lower risk while trading. While trading strategies may seem of utmost importance in the industry, it does not guarantee profits. Profits depend on how a trader manages his or her money. In this regard, profitability depends on the money management strategy being applied with the trading strategy. Among the most popular and preferred money management strategies used in trading is the Martingale Strategy. So, what is the Martingale Strategy and how can a trader improve trading profitability with it?
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Martingale Strategy
The Martingale Strategy is a strategy introduced by Paul Pierre Levy, a French mathematician who designed this strategy as a method of investing. While it seemed profitable, this strategy also involved an equivalent number of risks. It is a popular investment strategy used mainly in betting and gambling and is now also adapted into trading.
Paul designed this strategy to increase volume or amount of investment for every loss, with the anticipation for a future win. In other words, the invested amount is doubled for every losing trade until a win is achieved. After every win, the invested amount returns to the capital or minimum amount.
The invested amount for the losing trade is doubled every time until a winning trade is achieved. Ideally, this strategy focuses on winning back all lost amounts with a single winning trade.
How to use Martingale Strategy on Trading
Now we’ve mentioned earlier that the Martingale Strategy is not a trading strategy but a money-management strategy to improve the management of profits. Without a good money management strategy, any trading strategy will not be profitable.
With that said, using the Martingale money-management strategy requires a trading strategy. It can be any trading strategy that the trader is familiar with and knowledgeable of. As an example, let’s use a moving average trading strategy that identifies entry and exit levels when the price bounces or breaks through a specified moving average. This particular strategy is shown in the image below.
Considering this chart, let’s assume that the trader made 7 trades which involved 5 winning trades, and 2 losing trades. After the seventh trade, it was no longer ideal to engage the trade due to the divergence between the price and the RSI indicator. The divergence gave a signal that the trend is about to change and the strategy is no longer applicable.
Here’s a chart comparison of the profits made using the Martingale Strategy and one without using any money management strategy.
For this example, let’s assume that the initial investment is $10.
|
Martingale Strategy |
Without Strategy | |||
|
Trade Number |
Investment | Profit | Investment |
Profit |
|
1 |
$10 | $10 | $10 | $10 |
|
2 |
$10 | $10 | $10 | $10 |
|
3 |
$10 | $10 | $10 | $10 |
|
4 |
$10 | -$10 | $10 |
-$10 |
| 5 | $20 | -$20 | $10 |
-$10 |
| 6 | $40 | $40 | $10 |
$10 |
| 7 | $10 | $10 | $10 |
$10 |
| Total | $50 |
$30 |
||
Based on the table, the Martingale strategy doubles the invested amount after every loss. Whereas the other method without a money management strategy simply goes back to the initial investment of $10 for every loss. With this example, the profit gained by using the Martingale strategy is much higher than the trades without a money management strategy.
Common Mistakes in Using the Martingale Strategy
Although the strategy seems to be very profitable, there are many ways that it can blow up an account if not used accordingly. Here are a few mistakes that traders make when using the Martingale Strategy.
Not Defining a Maximum Loss
One mistake that traders make when using the Martingale strategy is that they do not define or establish a maximum loss. The Martingale strategy points out that the more losses you make, the bigger the amount you’ll win in the end – but that’s if you win in the end. If you don’t specify a maximum loss amount, there is a great risk of running into more losses and eventually blowing up your funds.
Trading with a Small Account
Another mistake that traders encounter when using the Martingale strategy is that they trade with very little funds. Understand that the Martingale strategy doubles a loss every time, and there is no guarantee that the doubling-up will stop. For such a strategy, you need to have a good amount of funds in your account. The last thing you’d want is to miss that one huge win just because you didn’t have enough funds for that one last trade.
Unfamiliar with the Trading Strategy
Among the worst things you can do as a trader is to be unfamiliar with the trading strategy that you are using. If you have less knowledge about the trading strategy that you are using, the Martingale money-management strategy also becomes useless. Since the trader is not familiar with the strategy, there are lesser chances of winning a trade. Before actually pairing any trading strategy with the Martingale money management strategy, make sure that you are well-aware of everything you need to know. Furthermore, make sure to practice using the strategy. A good way to practice any strategy with the Martingale money management strategy is through the Pocket Option demo account. The demo account provides you with virtual funds that you can use to trade in real-time.
Our Final Thoughts
The Martingale strategy is a commonly used money-management strategy not only for trading but also for betting and gambling. While the rewards with using the Martingale strategy are indeed impressive, the potential loss can also be quite enormous consecutive losses can blow up an account. However, losses can be minimized by avoiding the mistakes mentioned earlier.
If you have comments, questions, and suggestions about this article, let us know through the comment box below.
Enjoy and Good luck!
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