The Martingale method: a dangerous but effective method of money management
The dangerous Martingale money management method came to the world-famous "Foreign Exchange" with the light hand of gamblers. Some traders, especially beginners, perceive the method as a trading strategy and consider martingale as the only way to achieve 100% profit. Experienced professionals are cautious with the card players' tactics because not only profit awaits the trader at the end of the way, but also a very probable deposit dump.
What is Martingale?
The main argument for The martingale principle in the market is a well-known fact: the martingale tactic, successfully used in gambling games (poker, roulette) for two centuries, caused the appearance of minimum and maximum bets and two green fields: "0", "00". Thus, the casino owners protected their business from the martingale system, respectively, traders' confidence that the method provides profits is not unfounded.
The mathematical principle of martingale The strategy was discovered by Paul Pierre Levy, a French mathematician, based on probability theory. The original version of the strategy is simple: a player makes a bet and each time the bet closes with a loss, he doubles the trade. As a result, all losing trades are covered by one winning position. The strategy on which the martingale system is based is most convincingly demonstrated by the example of the game "eagle-reckoning":
The player makes a bet (5$) - flips a coin and bets on a side falling in one direction, such as "eagle".
Each subsequent throw the bet is doubled, adhering to the chosen direction ("eagle").
After waiting for the desired side, the player recovers all losses with a profit in the original bet (5$).
Joseph Leo Doob, the American colleague of the famous Frenchman, argued that this strategy can make 100% profit. Nevertheless, martingale is still successfully used in the foreign exchange market as a dangerous but effective method of money management. However, a simple eagle-reckoning example demonstrates the vulnerabilities of the strategy: the amount in the player's pocket must be sufficient (or better, unlimited) to keep playing until the right side comes up, while constantly doubling the bets.
Using the Martingale Method on
Comparison of the casino strategy with the martingale method is clearly in favor of the latter. First, the tactics have been significantly improved and, as is usual in trading, where demand breeds supply - brought to automatism. However, do not flatter yourself - as the method of money management, as well as the proposed advisors are not a guarantee of 100% profits. Secondly, the martingale system has an indisputable advantage compared to the same stocks: any company can go bankrupt, and the country, even with currency devaluation, will not reach "0".
On the "Foreign Exchange" martingale method for has another advantage: even with a series of unsuccessful transactions, the trader will receive the expected profit, because the pullback of the price - the basic law, sooner or later will happen. The only question is, whether the deposit is enough to withstand serious drawdowns? At the currency exchange, the principles of gambling and the vulnerabilities of the strategy are preserved: the need to double lots implies a bottomless "depot". However, for those who "missed" the trend and opened positions incorrectly, the martingale system is the only plan of salvation, unless you consider the probability of an all-out disaster, in which the currency pair will go to "0".
Let's look at a simple example of using this strategy in the market
1. Choose any currency pair.
2. Enter a buy or sell position clearly in the direction of the current trend with the minimum lot. To determine the trend, you can use a chart with a large timeframe (for example, D1). Once we have determined the direction of the price (for example, upward), we open a position (in our case, to buy Buy).
3. To the open transaction necessarily establish equidistant orders stop loss and take profit (50 points for each from the entrance to the market).
4. If the price beats our take profit, at the same level we open a new position, also to buy and with the same orders.
5. If, on the other hand, the price, struck out stop loss, at its same level open a new trade in Buy with the same orders, but the lot for the position should be twice as large as the previous (already closed) position.
That is, if the first transaction was with lot 0.1 and knocked out a stop loss, then for a new open trade (in the same direction as the first one) the lot should be 0.2 (this is the main principle of martingale on ). And so on.
In order not to wait until the price reaches take profit or stop loss, you can set appropriate pending orders at their levels for the automatic opening of new trades in the right direction.
The martingale method in the market is not "liked" by stock speculatorsThe stock market speculators usually create an average model similar to the famous "bubble" formula: they operate with large amounts of money and use marting. Exchange speculators, as a rule, create an average model similar to the well-known "bubble" formula: they operate with large sums and, using martingale in trading, increase losses in the hope of a proportional increase in profits.
What do traders need to know when using the martingale strategy?
In practice, the martingale is an effective tool in the hands of one who adopts the principles of the strategy. The term, by the way, was first used to refer to a clamp that prevented the horse from tilting its neck, and was also referred to as a piece of ship's rigging to strengthen the jib and bowsprit against the force of the staffs... in general, the principle is to apply increased force to a negative result.
What a trader needs to know for the correct application of the martingale system on ? - making profitable trades can be increased up to 87% (vs. 50%) even if the trader works with minimal deposit (4 financial margins). Given the doubling principle, it is necessary to calculate your forces, limit yourself to small volumes of transactions and provide, even before the experiments, a large deposit.
Jokingly, experienced pros recommend trying the card player strategy to those to whom a broker is ready to open a limitless line of credit. However, the fact remains: Martingale is a strategy with an excessive level of risk - 62% vs. 2% accepted in the exchange. The classic version of the gambler's system is the entry at random (vs. trend) is highly discouraged. If you do use the method, it should be in modified versions, adapted to "Foreign Exchange":
- A simple method
Increase the lot value and double the trading positions after each loss, but enter the market only on the trend. The disadvantage of the method is a high level of risk, since trading involves the investment of significant amounts of money.
- Complicated method
Increasing the denomination after each successive losing trade within 40% (by a factor of 1.3-1.6 compared to doubling). This method significantly reduces the range of losses and the probability of losing the deposit, but provides less profit. When choosing this method it is necessary to limit the use of take profit and strictly control the stop loss, increasing the level when the dynamics are positive.
When choosing a martingale method, be sure to make a sell or buy decision based on either independent research or reliable analytics. Entry "at random" is inadmissible, although it is possible to use the card system as an addition to the strategy for an unsuccessful entry. However, it is worth noting that a bad trading strategy (up to 40% profitable trades) cannot be corrected. Another condition for profit when using the method is to start trading with the minimum lot. Profit in this case will be insignificant, regardless of the chosen option (simple, complex), but, thanks to the averaging position, the probability of losing the deposit is also minimal.