FX Trading The Martingale Way

FX Trading The Martingale Way

Imagine a trading strategy that is practically 100% profitable - would you be interested? Most traders will probably reply with a resounding "Yes", especially since such a strategy does exist and dates all the way back to the eighteenth century. This strategy is based on probability theory and if your pockets are deep enough, it has a near 100% success rate. Known in the trading world as the martingale, this strategy was most commonly practiced in the gambling halls of Las Vegas casinos and is the main reason why casinos now have betting minimums and maximums and why the roulette wheel has two green markers (0 and 00) in addition to the odd or even bets. The problem with this strategy is that in order to achieve 100% profitability, you need to have very deep pockets - in some cases, they must be infinitely deep. Unfortunately, no one has infinite wealth, but with a theory that relies on mean reversion, one missed trade can bankrupt an entire account.Also, the amount risked on the trade is far greater than the potential gain. Despite these drawbacks, there are ways to improve the martingale strategy. In this article, we'll explore the ways you can improve your chances of succeeding at this very high risk and difficult strategy.

What is Martingale Strategy?
Popularized in the eighteenth century, the martingale was introduced by a French mathematician by the name of Paul Pierre Levy. The martingale was originally a type of betting style that was based on the premise of "doubling down". Interestingly enough, a lot of the work done on the martingale was by an American mathematician named Joseph Leo Doob, who sought to disprove the possibility of a 100% profitable betting strategy.

The mechanics of the system naturally involve an initial bet; however, each time the bet becomes a loser, the wager is doubled such that, given enough time, one winning trade will make up all of the previous losses. The introduction of the 0 and 00 on the roulette wheel was used to break the mechanics of the martingale by giving the game more than two possible outcomes other than the odd vs. even or red vs. black. This made the long-run profit expectancy of using the martingale in roulette negative and thus destroyed any incentive for using it.

To understand the basics behind the martingale strategy, let's take a look at a simple example. Suppose that we had a coin and engaged in a betting game of either head or tails with a starting wager of $1. There is an equal probability that the coin will land on a head or tails and each flip is independent, meaning that the previous flip does not impact the outcome of the next flip. As long as you stick with the same directional view each time, you would eventually, given an infinite amount of money, see the coin land on heads and regain all of your losses plus $1. The strategy is based on the premise that only one trade is needed to turn your account around.