Dating back to the 18th century, the Martingale strategy is based on probability theory. This strategy relies on the theory of mean reversion, doubling an investment after a loss to recover previous losses and make a profit. Martingale trading is a popular strategy in the forex (FX)markets. Traders often commit to making a significant investment with this method.
Key Takeaways
- The Martingale strategy requires doubling down on every losing bet.
- Only one win is needed to recoup all previous losses with a Martingale method.
- Forex traders use the Martingale system because it lowers the average entry price.
What Is the Martingale Strategy?
The Martingale strategy was introduced by the French mathematician Paul Pierre Levy. The 20th-century American mathematician Joseph Leo Doob studied the strategy and sought to disprove the possibility of a 100% profitable betting strategy. The method started as a betting strategy based on “doubling down.” An initial bet is doubled each time the bet becomes a loser. Given enough time, one winning trade will make up all previous losses.
Suppose an individual has one coin and engages in a game of heads or tails with a starting wager of $1. There is an equal probability that the coin will land on heads or tails. Each flip is an independent random variable and the previous flip does not impact the next flip. However, if the person doubles their bet every time they lose, they would eventually win and regain all of the losses, plus $1.
The 0 and 00 on the roulette wheel were introduced to break Martingale’s mechanics by giving the game more possible outcomes. The long-run expected profit from using the strategy in roulette turned negative, discouraging players from using it.
Winning vs. Losing
| Winning Streak | ||||
|---|---|---|---|---|
| Bet | Wager | Flip Results | Profit/Loss | Account Equity |
| Heads | $ 1 | Heads | $ 1 | $11 |
| Heads | $ 1 | Tails | $ (1) | $10 |
| Heads | $ 2 | Tails | $ (2) | $8 |
| Heads | $ 4 | Heads | $ 4 | $12 |
Assume an individual has $10 to wager, starting with the first wager of $1. They bet on heads, the coin flips that way, and they win $1, bringing equity to $11. With each win, they bet the same $1 until they lose. The next flip is a loss and the account is back to $10.
On the following bet, they wager $2 to recoup the previous loss and bring net profit from $0 to $2. Unfortunately, it lands on tails again. They lose another $2, bringing total equity down to $8. Using the Martingale strategy, they double the wager to $4 on the next bet. They win, gain $4, and total equity equals $12. One win recouped all previous losses.
| Losing Streak | ||||
|---|---|---|---|---|
| Your Bet | Wager | Flip Results | Profit/Loss | Account Equity |
| Heads | $1 | Tails | $ (1) | $9 |
| Heads | $2 | Tails | $ (2) | $7 |
| Heads | $4 | Tails | $ (4) | $3 |
| Heads | $3 | Tails | $ (3) | ZERO |
An individual has $10 to wager, with a starting bet of $1. In this case, they immediately lose on the first bet and the balance is $9.They double their bet on the next wager, fail again, and end up with $7. On the third bet, the wager goes up to $4.
The losing streak continues, bringing the balance down to $3. The individual does not have enough money to double down, so they bet it all. The strategy did not work in this scenario.
The strict application of the Martingale strategy produces a 100% success rate until it ends with the complete loss of all capital.
Forex Trading Example
In forex trading, investors trade currencies and can employ the Martingale system. When applied to the trade and “doubling down,” a trader lowers their average entry price. In the example below at two lots, a trader needs the EUR/USD to rally from 1.263 to 1.264 to break even. As the price moves lower and they add four lots, they only need to rally to 1.2625 instead of 1.264 to break even.
The more lots they add, the lower the average entry price. The trader may lose 100 pips on the first lot of the EUR/USD if the price hits 1.255. On the other hand, they only need the currency pair to rally to 1.2569 to break even.
This example illustrates why significant amounts of capital are needed for the Martingale strategy. If the trader has only $5,000 to trade, they would be bankrupt before the EUR/USD reaches 1.255. The currency should eventually turn, but the trader cannot stay in the market long enough to achieve a successful end.
| EUR/USD | Lots | Average or Break-Even Price | Accumulated Loss | Break-Even Move |
|---|---|---|---|---|
| 1.2650 | 1 | 1.265 | $0 | 0 pips |
| 1.2630 | 2 | 1.264 | -$200 | +10 pips |
| 1.2610 | 4 | 1.2625 | -$600 | +15 pips |
| 1.2590 | 8 | 1.2605 | -$1,400 | +17 pips |
| 1.2570 | 16 | 1.2588 | -$3,000 | +18 pips |
| 1.2550 | 32 | 1.2569 | -$6,200 | +19 pips |
What Are the Costs of the Martingale System in Stock Trading?
For stock traders, the amount they spend increases rapidly with each successive trade. Each trade also comes with transaction costs.
Why Is the Martingale Strategy Popular in Forex Trading?
Although they may sharply decline, a currency’s value rarely reaches zero. The FX market offers an advantage to traders with capital for the Martingale strategy. Interest allows traders to offset a portion of their losses with interest income. That means an astute Martingale trader may use the strategy on currency pairs in a positive carry. They would borrow using a low-interest-rate currency and buy a currency with a higher interest rate.
What Is the Anti-Martingale Method?
Used by some traders, the anti-martingale strategy means doubling down on winning bets during a period of expansive growth in the markets. At best, trading profits soar as long as the boom lasts. At worst, losses are greatly reduced when the boom ends.
The Bottom Line
The Martingale trading strategy works for traders who may be able to afford any gambling losses associated with the method. However, for many, the strategy may offer more risk than reward.
