This legendary system has been around for a very long time and it’s one of the most talked about strategies of all time. To be honest though, it’s not really a strategy, it’s more of a risk management system but it’s not even really one of those either. Today we are going to explain it in detail and get to the bottom of the all hype to see if it sucks or not.
The Martingale strategy originates in France and was first used in the 18th century. The most basic form was applied in the game of coin toss – a gambler wins if the coin comes up heads and loses if the coin comes up tails. (To be honest, things are not looking good for the Martingale right now because any association between a coin toss and trading…sucks big time but let’s keep an open mind and continue) If the gambler wins, he plays again or leaves the gambling table to spend his easy money, but if he loses, he must double up on his bet in order for his potential win to cover for the previous loss and provide a win equal to the original bet at the same time. Basically, it helps you maintain momentum when having a great long winning streak by bridging the gap of a few losses.
How to Use the Martingale Strategy?
Here is an example: if the first flip of the coin is a loss of $1, on the second one he bets $2. If the gambler wins this toss he wins $4. This returns his $2 stake and he covered his loss of $1 on the first bet and on top of that he made an extra dollar. All good so far but if he loses the second toss as well, he must double up his previous bet so now he has $4 at stake. If he wins he profits $4 on the trade which will cover his previous losses and bring him an extra dollar (first loss – $1, second loss -$2, total – 3 dollars).
If he loses, he will again double up the previous loss, which means he will bet $8. Ok, I’m not going to bore you anymore and just tell you that this doubling up will go on indefinitely until a win comes along. It will look like this: -$8, -$16, -$32, -$64….hmm, pretty long way from $1, which was our initial bet, but the point is it will cover all your previous losses and provide a $1 profit once you hit a winner. Well, in our scenario the gambler keeps trading until eventually the coin feels bad for all the losses and comes up heads for the final win. Given that our current bet was $128 (double the previous loss) we gain that amount and cover all the losses, plus $1 (all or losses summed up were -$127, basically your profits will be the current return – (the cost of the current trade + cost of the previous trade) = amount of original bet). That’s about it with the explanation so let’s look at the pros and cons of the strategy:
Why does the Martingale Strategy Suck?
Think of it this way: what if the streak of losses extends to 10, which is very possible? Assuming you just started with a bet of $1, your current bet would have to be $512…and if you win that, you make a measly profit of one buck (all your previous losses are -$511). Our bets will grow exponentially with every loss and the numbers will quickly get out of control if you never win and eventually you will run out of money. This strategy has no “edge”, nothing to make it work other than pure LUCK! It is clearly and with no doubt a gambling strategy and does nothing for you except the illusory promise of capital preservation…but maybe there is still hope for it and we could make it work in trading. Of course, before we move one, there is a bit of a problem when using Martingale with binary options. For it to work as described your trades must pay 1 to 1 or 100%. If you trade $100 you have to get $200 back on a win otherwise its a losing game. If you only get back say 80% then you only return 60% of the original trade.
Why the Martingale Strategy Doesn’t Suck
It is mathematically proven that eventually the coin will come up heads and we will win , , , if we can keep betting. The fact that you will win without a doubt and make at least a little profit generated the huge hype of the Martingale. However, you need two things to win for sure: infinite money and infinite time…yes, both hard to find, but don’t forget we are traders, not gamblers. A trader tries to tilt the odds in his favor using technical and fundamental analysis. If we combine Martingale and good analysis of the market…we might have a winner. Now, I’m not talking about a complete novice that just uses Martingale and has no idea about market environment, but a trader that can get the direction right at least once in five trades, or depending on his account balance, even once every ten trades.
Playing To Win Or Playing Not To Lose
Money management and risk control are the bread and butter of all traders, or gamblers for that matter. If you lose your wad you just can’t make the next trade, it is that simple. The problem is that it is possible to over manage your risk, to keep to tight a control on your money and thereby keep your self from making profits. This is called playing not lose. You may not lose your wad but you don’t win much either, and that is what the Martingale Strategy is, a way to play not to lose. All it does is prolong your play time until all those previous losses add up to an amount that will wipe your account right out of the market. It is by far better to play to win. You want to manage your risk, but you also want to let your winners win and to do this you have to accept your losses (one of the virtues of trading), and move on from them. This is why true money management and the Percent Rule we here at ThatSucks.com (former BinaryOptionsThatSuck.com) love so much is so very important. It keeps losses small so that no one loss, or losing streak, will wipe you out and yet will also let each trade grow as your account grows, maximizing profits. So, are you playing not to lose or are you playing to win?
Conclusion – Use the Extreme Caution!
I am not really a follower of traditional trading and money management techniques but I kind of like the Martingale and I consider that if used wisely – and please note that the bold characters are not used by mistake- it can turn out to be profitable. I mean, it’s fun to use when you’re playing roulette and can be used to have fun with binary options but not as a strategy by itself, because that is just gambling and hoping. If you are confident that your thoroughly tested system has an average losing streak that won’t blow your account or you just want to make a few trades to see if you like it, then you might consider a Martingale system to help cut your losses, knowing that eventually a winning trade will come. If all you do is gamble wildly on the market and think of yourself to be a trader then the Martingale will eventually blow in your face and you will be left with no money in your pocket.