If you’ve been involved in forex trading for any time the chances are you’ve heard of Martingale. But what is it and how does it work? In this post, I’m going to talk about the strategy, it’strategic and tactical forex trading download strengths, risks and how it’s best used in the real world. There are a few reasons why this strategy is attractive to currency traders.
Firstly it can, under certain conditions give a predictable outcome in terms of profits. It’s not a sure bet, but it’s about as close as you can get. Secondly it doesn’t rely on an ability to predict absolute market direction. This is useful given the dynamic and volatile nature of foreign exchange. It yields a better return the more skillful you are. But it can still work when your trade picking skills are no better than chance.
As with grid trading, that behavior suits this strategy. This results in lowering of your average entry price. The important thing to know about Martingale is that it doesn’t increase your odds of winning. Your long-term expected return is still the same. It’s governed by your success in picking winning trades and the right market. What the strategy does do is delay losses.
Under the right conditions, losses can be delayed by so much that it seems a sure thing. How It Works In a nutshell: Martingale is a cost-averaging strategy. The idea is that you just go on doubling your trade size until eventually fate throws you up one single winning trade. At that point, due to the doubling effect, you can exit with a profit. A Simple Win-Lose Game This simple example shows this basic idea. Imagine a trading game with a 50:50 chance of winning verses losing. If I lose, I double my stake amount each time.
If the odds are fair, eventually the outcome will be in my favor. And since I’ve been doubling my stake each time, when this happens the win recovers all of the previous losses plus the original stake. This is thanks to the double-down effect. Winning bets always result in a profit. That means the string of consecutive losses is recovered by the winning trade. A Basic Trading System In real trading there isn’t a strict binary outcome.
A trade can close with a certain profit or loss. But this doesn’t change the basic the strategy. You just define a fixed movement of the underlying price as your take profit, and stop loss levels. The following case shows this in action. I’ve set my take profit and stop loss at 20 pips.
Table 2: Averaging down trade entry levels in falling market. I start with a buy to open order of 1 lot at 1. The rate then moves against me to 1. 3480 giving a loss of 20 pips.