Martingale is a very old strategy, originally from France from the 18th century. It was a method used in heads or tails betting games. Since there are only two sides and 50-50 odds, those who used the strategy believed that betting always on the same side, would win, sooner or later.
How does the Martingale Method work?
– In order to use this strategy we can only have two possibilities. For example with binary options, Martingale can be used because the possibilities are up or down (Put or Call).
– When we place a bet using the Martingale method we have a grid in which when we lose, we double the previous bet amount and when we win, we return to the initial bet amount. For example, if we start betting with one, if we lose we double the bet to two, then four, then eight, and so on until we win. When we win, we place a bet of one again.
– The purpose is to never have losing bets, because as we double the bet every time, when we finally win we recover the value of all the previous bets and the profit, which is equal to the profit of the initial bet.
– In theory, the use of the Martingale method, prevents losses and ensures that you always have profits.
Advantages of Martingale
– You do not need a special strategy to trade, because if a trader always places Calls or Puts (up or down), he will win some of the times and recover the investment made in the losses.
– The probability of winning in each bet is always 50%, so the probability of never winning at least one time in five trades is small.
Disadvantages of Martingale
– The Martingale method uses probability to ensure that you will have profits. But it does not guarantee when. Since you have to double your investment every time you lose, your account has to have a high balance to ensure that you have the capital to continue until you win. Imagine you have an account with $500 and start with a $5 trade, which is equivalent to 1% of your account which is the value recommended in risk management and you lose 8 trades in a row. The values would be something like this: 5-10-20-40-80-160. At this point, you will only have $185, which means you can no longer use this method. In practice, if you lose six times in a row you end up with less than 50% of your original amount. It’s not very likely to happen, but it’s enough if it happens once.
– Gains are low, for the risk you take. In order to be able to double the amount invested several times, we have to have an account with a hight value and have the initial amount be as low as possible. In the example above, for an account with $500, each time we earn a profit it will average $4, and if we fail 6 times, we are down $315 soon; if we fail a 7th time we lose all the money in the account. To lose everything in the account all it takes is 7 consecutive losses, to double the capital we need to win 125 times. The question is: What is the probability that in one of these 125 times that we gain, we will only once have 7 consecutive losses? I’d say it will be about 10%. It is not a very high percentage, but it is real and it means that these 10% represent the loss of all our capital.
Conclusion of the Martingale Method
Nobody can guarantee that you won’t lose 6, 7, 8 or more times consecutively. Even though the probability is low, it’s real.
Because it is an easy method to put into practice, it is dangerous because you can quickly lose all the money in the account.
The larger the account and the amount invested, the more times you can double the investment and thus you will have more security. However, there is still no guarantee you will never lose.
We’ve all seen lots of videos from people who say that they use it and that is foolproof, they earn thousands every month.
The question I always ask myself is: If I had a foolproof method to earn thousands every month, I would be rich, right? What if you had the same amazing method? You’d be rich, right? And if you were rich, would you go through the trouble of making videos and putting them on Youtube showing your foolproof system? I wouldn’t … no one would!
I’ve used the Martingale Method in Forex and I ended up losing all the money in my accounts, and because of that as well, I am not a fan of using this method. On the other hand I won a binary options tournament using a method of mine that I tested and had a part that was Martingale, but that controlled the amount of losses and thus prevented the account from losing everything.
However, even with a victory in this tournament, I believe that the use of Martingale is dangerous if it is not used carefully.