If there is one trading system or approach that tends to spark fierce conflict within the trading community, then perhaps nothing comes as close as the Martingale trading method.
It is perhaps due to the fact that the Martingale approach to trading is based on probabilities and chance than anything else. So what is this martingale trading method and should you be using it? Read this article to form your own opinion. Martingale is a probability theory of fair game which was developed by a French mathematician, Pierre Levy in the 18 th century. Without getting too technical, from a trading perspective, Martingale approach involves doubling up every time a loss is incurred.
Taking the example of a simple heads and tails of the coin flip, in a Martingale approach, every time there is a loss, the next bet is doubled, in hopes to recover the losses as well as gain one up from the loss. As you can see from the basic definition of Martingale, it can be a very profitable yet very risky way to trade the financial markets.
The Martingale approach of trading is more popular with gambling, especially with Roulette where the chances of hitting a Red or Black are 50 — So, to define Martingale from a forex trading approach, it is nothing but a process of cost averaging, where the exposure is increased doubled on losing trades. Despite the risks posed by Martingale trading method, there are a good number of followers to this trading strategy.
It is probably best to illustrate the Martingale way of trading with a simple example. Remember, that we double down or double our bets during a losing trade.
From the above table, it is now easier to understand that if the trader hit a series of losing trades, their equity would have been burned out.
Which brings to question, what happens if you use the Martingale trading strategy to a currency pair or instrument where there is a clearly established trend? Of course, in this case, the results would awesome. However, such an approach is also not void of risks. In this example, notice how the trade entry was doubled every time price dropped by 5 pips. But the above illustration is a best case example.
The important take-away from the above example, is the price move itself. Ideally if a trader went long at 1. The Martingale way of trading forex, in theory works. But for this to happen, traders need to have a very high level of confidence and experience trading the forex markets.
Look at the example below: Here, we apply a simple price action scalping strategy of the trend line break method. After a first short position was initiated near the low of the candle formed below After a 10 pip move against the initial trade trade 1 , the second trade is initiated with 2 lots doubled from the previous 1 lot trade.
With the target price for both the trades being the same, the results are vastly traded. The risks of course for such an approach would be different, compared to a simple approach to trading. Assuming the stops for the short trade was at 1. It is easy to understand that while Martingale trading method can potentially increase the profits, the risks are also equally the same. In order to be successful with trading the martingale approach, traders need to have a good risk management strategy in place along with a firm background in technical analysis and familiarity with a trading system that they use.
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