Managing money is very important. That is, every monetary transaction made requires some decisions so as to achieve the best bargain or profit. Therefore, a strategic measure in money management requires some specific plans together with controlled spending and knowledge of one’s investment. Money management is essential for a profitable trading. The main objective to increase profit while cutting on losses.
The Martingale is a trading strategy that defies common sense. Instead of lowering your stake after a loss, Martingale advises that you should increase the stakes so as to recover the lost incurred initially. According to Martingale, if you lose, you should place a multiple the initial investment. This process continues until you win after which you start once again.
How Martingale works: ’The end justifies the means’
According to Martingale, trading and gambling are similar in that, the probability of winning or losing is 50/50. This strategy has proven to work in gambling industry, particularly in blackjack or roulette. With trading, the losses might be too high but still it is a matter of chance and when done correctly, it can be successful.
Just like gambling, for example roulette, there is an equal probability of getting either red or black . Therefore, you cannot lose continuously. If you win, basing on the multiple investment, you will have accounted for all the losses made previously and make some profit.
However, is the Martingale money management strategy dangers or effective? We are going to looks at its pros and cons as well as its practicality when it comes to trading. This strategy can be good or bad depending on your viewpoint.
The Marathon v/s the sprint Mentality
The Martingale money management strategy is like a marathon and not a sprint. For one, if you view trading as a form of gambling, there might be a chance of winning in the long run. Bearing in mind that the winning shot is around the corner, you can follow the strategy without having second thoughts.
In this case, losing at initial investment only means that with one shot of a win, you can recover your losses and earn some profit on the next one. The higher the stake, the higher the returns.
On the other hand, without a gambler’s mentality, losing may create anxiety that may result in rush decisions leading to huge losses. This strategy requires the utmost commitment and focus. The fear of losing money may impair your judgement into making bad decisions or withdrawing after you have incurred some losses. People are usually motivated by immediate results and not the bigger picture, therefore, one might go for the small wins as opposed to
the small losses.
The chances of success are higher for markets bound within certain range.
You can determine returns and predict profit margin.
There are higher chances of maintaining short-run profits.
Large amount of capital is needed for the strategy to work.
Leverage can multiply faster leading to even higher losses.
You may experience financial crisis relying on market trends.
That said, the purpose of an effective money management strategy is to maximize the winning trades and minimize losses. Therefore, to expound on the pros and cons, we are going to look whether it is effective or not.
Martingale strategy: Effective
For the Martingale money management strategy to work, you should be flexible and take your time to be more familiar with the market. Limiting the draw-down of the whole system is the best way to apply the Martingale strategy in real world. This can be broken down to the following tips.
i.) Take time to understand the cycles
To begin with, this strategy requires one to set aside a considerable amount of money. That said, you should first set aside a certain amount of the money for the initial cycle. Begin by setting making small investment depending on the allocated amount. This amount should be a fraction of the total money you intend to invest.
Let’s say that you divide the portions into different pockets for example. The first pocket should be less compared to the second one. The purpose of the first pocket is for you to understand the trend of each cycle.
By the time you get into the second pocket, you will have some knowledge regarding the direction market. Therefore, unlike the initial investments, this will have higher returns due to higher stakes together with the fact that you are more familiar with the market.
i.) Partition your investment basing on different parts of the day
In order to fully understand the market trends, you need to divide your investment thrice, that is, for morning, afternoon and evening. Basing on the Martingale strategy, you should allocate some small amount of money for the morning market. The purpose of this investment is to test the markets.
Secondly, having noted the morning trend, you can go ahead and invests the money allocated for the afternoon trade when the time comes. This sum can be a little higher that the initial amount at a reasonable range. Remember, you are confirming the market trends ahead of the final investment.
Lastly, having a better understanding regarding the direction of the markets, you can invest the last portion on the evening’s market. The amount invested at the last market should be higher so as to incur as much profit as possible. The probability of winning at this stage is much higher because you have had better analysis of the market over a longer time.
The Martingale strategy: Dangers
As stated above the Martingale strategy requires you to allocate a lump sum of money. Having less money will mean that you will not have enough reserved for the winning trade assuming you have had a series of loses. The larger the amount the longer you will trade and hopefully get to the winning trade.
Additionally, there is no guarantee that the pattern will begin with losses. You might begin the trade with good luck and win several times, however, the returns will be depleted once you begin losing assuming you apply the exponential aspect of the Martingale strategy.
Finally, limiting the draw-down will minimize your chances of losing, however, once those risks catch up with you, it will be a huge loss. The longer you trade in this manner, the higher the chances of being wiped out financially by the extreme odds. This is because the trade increases exponentially, in this case, continuous lose will be catastrophic, forcing you to exit trading without having achieved your goals.
So, is the Martingale money management strategy dangers or effective? In my opinion, it is effective is done accordingly. The Martingale money management strategy has proven effective in binary options. Therefore, with commitment and adequate money in reserve, it is possible to reap higher returns from trading. The trick is to observe the pattern and allocate your money wisely bearing in mind the rules of martingale.