mohamed_nour433
New Member
Any ambitious trader is always looking for a way to improve their trading strategy or system. On the other hand, novice traders can be slightly one-dimensional in their focus. More often than not, inexperienced traders are too concerned with entry signals, and this can be detrimental to other important areas.
Martingale Strategy - Forex Trading
These areas are:
market selection
exit strategy
position sizing
objective-oriented strategy and psychology.
It's easy to underestimate each of these aspects. Entry signals inform you when it is a good time to trade. Position sizing is a discipline concerning how to trade. Some theories on position sizing derive from games of chance - specifically from betting progression systems. This article discusses Martingale trading, which is a position sizing strategy. First, we will take a look at Martingale in its original context of a game of chance. Then, we'll explore Forex Martingale trading within FX trading.
*Before we begin, please note that this strategy is extremely risky by nature and not suitable for beginners. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks involved.
How Martingale Trading Works
The theory behind a Martingale strategy is pretty simple. It is a negative progression system that involves increasing your position size following a loss. Specifically, it involves doubling up your trading size when you lose. The classic scenario for a Martingale progression is trying to trade an outcome where there is a 50% probability of it occurring. Such a scenario has zero expectation.
You would expect to make nothing and lose nothing in the long run. For this kind of 50/50 proposition, there's two schools of thought about how to size your trade size. Martingale strategy is about doubling your trade size when you lose. The theory is that when you do win, you will regain what you have lost. On the other hand, an anti-Martingale strategy states that you should increase your trade size when you win.
Martingale With Two Outcomes
Consider a trade that has only two outcomes, with both having equal chance of occurring. Let's call these outcome A and outcome B. The trade is structured so that your risk reward is at a ratio of 1:1. Let's suppose that you decide to trade a fixed sum of $5, hoping that outcome A will occur, but then outcome B occurs instead, and your trade loses.
For the next trade, you increase your size to $10, once again hoping for outcome A. It's B that occurs, and you subsequently make a loss of $10. Once again, you double up and now trade $20 - needing outcome A to gain a profit. You keep doing this until eventually your required outcome occurs. The size of the winning trade will exceed the combined losses of all the previous trades. The size by which it exceeds them is equal to the size of the original trade size. Let's run through some possible sequences.
Win the first trade and profit $5
Lose the first trade, but win the second trade
Lose $5 on the first trade and then win $10 on the second trade. This leaves you with $5 net profit
Lose first two trades, but win the third trade
You lose $5 on the first trade, $10 on the second trade, and then win $20 on the third trade
This leaves you with $5 net profit
You lose the first three trades, but then win the fourth trade
You lose $5 on the first trade, $10 on the second trade, and then $20 on the third trade At the same time, you win $40 on the fourth trade. Again, you are left with $5 net profit
The probability of you not profiting eventually is infinite - provided that you have infinite funds to double up with. As you can see from the sequences above, when you do win eventually, you profit by your original trade size. It sounds good in theory. The problem with this strategy is that you only stand to make a small profit. At the same time, you risk much larger amounts in chasing that small profit.
In our example above, we are looking to make only $5. But with a losing sequence of just three trades, we were already risking $40. Imagine if that losing streak had persisted a little longer. If you lose six times in a row, you are risking $320 to chase your $5 profit. In other words, you are sitting on a loss of $315, attempting to win just $5. The chances of getting a six-trade losing streak are small - but not so remote.
In fact, they are greater than 1%. What if your risk capital was only $200 in total? You would be forced to quit with a large loss on your hand. This is a key problem with the Martingale strategy. Your odds of winning only become guaranteed if you have enough funds to keep doubling up forever. This is often not the case.
Everyone has a limit to their risk capital. The longer you apply a Martingale trading strategy, the greater the chances are that you will experience an extended losing streak. Depending on your mindset, you might find this an off-putting proposition. Needless to say, Martingale strategy does have its advocates. Now, let's look at how we can apply its basic principle to the Forex market.
Martingale Strategy - Forex Trading
These areas are:
market selection
exit strategy
position sizing
objective-oriented strategy and psychology.
It's easy to underestimate each of these aspects. Entry signals inform you when it is a good time to trade. Position sizing is a discipline concerning how to trade. Some theories on position sizing derive from games of chance - specifically from betting progression systems. This article discusses Martingale trading, which is a position sizing strategy. First, we will take a look at Martingale in its original context of a game of chance. Then, we'll explore Forex Martingale trading within FX trading.
*Before we begin, please note that this strategy is extremely risky by nature and not suitable for beginners. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks involved.
How Martingale Trading Works
The theory behind a Martingale strategy is pretty simple. It is a negative progression system that involves increasing your position size following a loss. Specifically, it involves doubling up your trading size when you lose. The classic scenario for a Martingale progression is trying to trade an outcome where there is a 50% probability of it occurring. Such a scenario has zero expectation.
You would expect to make nothing and lose nothing in the long run. For this kind of 50/50 proposition, there's two schools of thought about how to size your trade size. Martingale strategy is about doubling your trade size when you lose. The theory is that when you do win, you will regain what you have lost. On the other hand, an anti-Martingale strategy states that you should increase your trade size when you win.
Martingale With Two Outcomes
Consider a trade that has only two outcomes, with both having equal chance of occurring. Let's call these outcome A and outcome B. The trade is structured so that your risk reward is at a ratio of 1:1. Let's suppose that you decide to trade a fixed sum of $5, hoping that outcome A will occur, but then outcome B occurs instead, and your trade loses.
For the next trade, you increase your size to $10, once again hoping for outcome A. It's B that occurs, and you subsequently make a loss of $10. Once again, you double up and now trade $20 - needing outcome A to gain a profit. You keep doing this until eventually your required outcome occurs. The size of the winning trade will exceed the combined losses of all the previous trades. The size by which it exceeds them is equal to the size of the original trade size. Let's run through some possible sequences.
Win the first trade and profit $5
Lose the first trade, but win the second trade
Lose $5 on the first trade and then win $10 on the second trade. This leaves you with $5 net profit
Lose first two trades, but win the third trade
You lose $5 on the first trade, $10 on the second trade, and then win $20 on the third trade
This leaves you with $5 net profit
You lose the first three trades, but then win the fourth trade
You lose $5 on the first trade, $10 on the second trade, and then $20 on the third trade At the same time, you win $40 on the fourth trade. Again, you are left with $5 net profit
The probability of you not profiting eventually is infinite - provided that you have infinite funds to double up with. As you can see from the sequences above, when you do win eventually, you profit by your original trade size. It sounds good in theory. The problem with this strategy is that you only stand to make a small profit. At the same time, you risk much larger amounts in chasing that small profit.
In our example above, we are looking to make only $5. But with a losing sequence of just three trades, we were already risking $40. Imagine if that losing streak had persisted a little longer. If you lose six times in a row, you are risking $320 to chase your $5 profit. In other words, you are sitting on a loss of $315, attempting to win just $5. The chances of getting a six-trade losing streak are small - but not so remote.
In fact, they are greater than 1%. What if your risk capital was only $200 in total? You would be forced to quit with a large loss on your hand. This is a key problem with the Martingale strategy. Your odds of winning only become guaranteed if you have enough funds to keep doubling up forever. This is often not the case.
Everyone has a limit to their risk capital. The longer you apply a Martingale trading strategy, the greater the chances are that you will experience an extended losing streak. Depending on your mindset, you might find this an off-putting proposition. Needless to say, Martingale strategy does have its advocates. Now, let's look at how we can apply its basic principle to the Forex market.
