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Martingale Strategy: A Ticking Time Bomb for Traders?

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Man gambling with chips using Martingale

So what is Martingale exactly, and should you use any part of it when trading Forex?

Or any financial market for that matter.

Those are the questions I’m going to answer in today’s post.

I’ll also share my version of a multi-tiered position sizing technique. Think of it as the opposite of Martingale.

Let’s begin.

What is a Martingale Strategy?

Martingale is a set of betting strategies in which the gambler doubles their bet after every loss.

The idea is that the first win would recover all previous losses and turn a profit.

Take a flipped coin for instance. If you were to bet $1 that it would land on heads and doubled your bet for every loss, chances are you would be able to recover any losses and make a profit.

Here’s how that would look:

Stake Outcome Profit/Loss Running Balance
$1 Lose $1 -$1
$2 Lose $2 -$3
$4 Lose $4 -$7
$8 Lose $8 -$15
$16 Win $16 $1
$1 Win $1 $2
 

After the first four flips you lost $15.

However, because you were doubling your stake after each loss, the fourth flip earned you $16. By the time you subtract the $15 you lost on the first four flips, you netted $1.

The strategy then resets with a $1 stake on the next coin flip.

Simple enough, right?

Even if we drag the number of flips out to 20 and assume you lost the first 19, which isn’t likely, you would still theoretically turn a profit.

In the world of Forex, Martingale strategies use a particular number of pips to double the bet size.

Let’s say that number is 20 pips. So if your Martingale strategy sold the EURUSD at 1.2400, it would double the position size if the pair went to 1.2420 before it reached 1.2380.

However, it not only doubles your position size, it also moves the new target from 1.2380 to 1.2400.

If the EURUSD then reached 1.2440 before hitting the new target at 1.2400, it would double the position size and set the new target to 1.2420.

Just like with the coin flip, once the target is reached, you would theoretically recover all losses and turn a profit.

The Dangers of Doubling Down

Unless you’re incredibly unlucky, using a Martingale strategy when flipping coins will eventually work in your favor.

But what about Forex?

It certainly isn’t the same as flipping a coin. Sure, you can only do two things, buy or sell, so in that regard it is a binary decision.

However, a market’s direction doesn’t end as abruptly as a coin hitting your hand. There’s no law of gravity telling the EURUSD that it must stop and reverse.

Markets do ebb and flow, but these movements are not on a schedule.

So what happens when your Martingale strategy sells the EURUSD for the fifth or sixth time or worse and the pair doesn’t move 20 pips lower to reach your profit target?

The answer is a blown account.

Of course, it depends on how much leverage you’re using, but I certainly wouldn’t want to add to a losing position even with low amounts of leverage.

A blown account is a mathematical certainty when using Martingale. Sure, it may work for a while. You may even get lucky and see it work in your favor for a few months or half of a year.

But when your luck runs out, so too will your funds.

A Better Way

I’m not a gambling man. I’ve never played poker or spun a roulette wheel, nor do I have a desire to do either one.

That may come as a surprise to some given the common misconception that traders are just gambling junkies who prefer charts instead of a roulette wheel.

Perhaps that comparison works for some traders, but it’s utter nonsense for the rest.

As for Martingale, I dislike the method so much that I use and teach its inverse.

What is that, exactly?

It’s a technique called pyramiding, also referred to as scaling into a position.

The rule of thumb here is to only add to winning positions, unlike Martingale which adds to losing positions.

To be honest, I’m not sure why anyone would want to add to a loss. A position that’s in the red is the market’s way of telling you that something might be wrong.

So why double up on a poor decision?

On the other hand, a winning position is a sign that something, at least in the interim, is going right. That’s when you want to add to a position.

The second rule when scaling in is to wait for a close above or below a key level. So if you’re shorting a market, you would want to wait for a daily close at 5 pm EST below the level before adding a second position.

Just be sure you’re using New York close charts. Otherwise, the timing of each session close will be off.

I also like to keep each position size the same when scaling in and I always trail my stop loss. That way I get to capitalize on moves in my favor without increasing my risk.

As for trading robots or Expert Advisors with MT4 that are a common vehicle for Martingale strategies, I dislike both.

I’ve often said that if you want to be a trader, you have to learn how to trade. There are no shortcuts in this business. Those who try to cut corners are fodder for the 5% of traders who have put in the thousands of hours of study time.

That may seem like a harsh way to end this article. However, I assure you that it’s my best attempt to convince you of what it takes to succeed in this unforgiving and often brutal game we call Forex trading.

Final Words

Martingale is arguably one of the riskiest trading strategies available. By doubling up on losing positions, you’re exposing your trading account to dangerous levels of drawdown that can lead to a blown account.

I’ll go as far as to say that using Martingale over an extended period is guaranteed to blow your account. In fact, it’s a mathematical certainty.

It also reinforces the bad habit of adding to a losing position. Most investors would refer to this as dollar cost averaging.

While that may work well in the stock market where investments are held for years or even decades, it’s incredibly dangerous when used in short durations in a volatile market like currencies.

So instead of Martingale or something similar, my advice is to learn price action strategies and techniques.  Also, if you are going to add to a position, only do so when the market is moving in your favor.

General FAQ

What is a Martingale strategy?

Martingale is a set of betting strategies in which the gambler doubles their bet after every loss.

Is a Martingale trading strategy risky?

In my opinion, yes, it can be incredibly risky! The risk of blowing a trading account is increased exponentially when using a Martingale strategy or system.

What are the dangers of Martingale systems?

The biggest concerns are a margin call and, of course, blowing your account. Because your bet size increases with every loss, so too does your chance of blowing up as there is no guarantee the market will reverse enough to get you out of your position.

Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.

Leave a Comment:

35 comments
Derrick says

I stick on mastering price action method

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Yemi says

Kindly assist some of us from Africa that are finding it difficult to analyse your trading chart?

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    Justin Bennett says

    You’ll have to be more specific. What exactly are you having trouble with?

    Reply
Ernst says

Hi Justin,

You mentioned trailing your stop loss. What plan do you follow? When do you decide to move to break even and trailing further up or down? Is it based on reaching a certain RR or on price action or when getting close to a key level? Thanks and keep up the good work, very informative

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Bolaji Akinwale says

Hi Justin how can I join the membership group I know NY so doing I save myself a lot of money.

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TripTrap says

Absolutely…110% agree with what Justin said about Martingale…a sure way to the poor house in currency trading given enough time. Probably the most famous example of this was “Black Wednesday” Sept 16th, 1992 when the Bank of England kept doubling down buying the Pound to shore it up and got their clock cleaned. George Soros kept pyramiding his winning short trade and made a billion dollars….yes, that’s billion with a “B”

Pyramid (add to) your winners as price breaks into new session highs / lows and trail your stops aggressively to keep risk to a minimum and leave Martingale to the 95% losers…

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    Justin Bennett says

    You got it! Well said.

    Reply
Regla Mercedes says

I would like to learn Price Action

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    Justin Bennett says

    You’re in the right place.

    Reply
HarryT says

I was drawn into Martingale when I was attempting to trade binaries on the smaller times. Blew through my account in 2 weeks. Scaling in is something I haven’t tried as yet since I’m still adjusting to longer time frames and sticking to price action. Thanks JB.

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    Justin Bennett says

    Martingale is a dangerous way to go for sure.

    As for scaling into winning trades, give it a try. I attribute most of my success to pyramiding. It can turn a 3R trade into a 10R or greater when done correctly.

    Reply
Yusuf Ahmad says

I strongly believe that the way is just to learn, I’m trying my best to learn and master the price action.
Please keep on leading.
Thanks

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Shufaad says

Hi Justin. I got one question.
How do negative interest rates works on the favour of a carry trader?

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madikana rwginald says

I really enjoy ur webinars ,now I know how to make profit like day traders…but am struggling with a mentor bcoz I cant afford ur causes bcoz of the big difference between south african rand n US dollars

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Kuhan says

Fantastic Justin

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Heshan says

Very good your articles help me to get good knowledge and support to trade

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Rex says

I did use Martingale. It’s just like time bomb waiting to explode where you don’t know when it’s gonna crash your money.

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Idongi says

Martingale strategy is only sweet when it goes in your favor but dangerous when going against you,i never try it on forex and i won’t even try but it common in the world of binary option. With it you can blow 1million dollars account it a day.

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Francis says

Hello Justin, thanks for the good work. My trading skills and psychology get improved anytime I read your articles. Thanks . Hope to join your membership soon.

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Brian says

With Martingale or hedging, you become sucked into the fallacy of always being right. You keep flip-flopping hoping you eventually get it right. Suckers game for me. Accept and cut your losses short, get perspective. Dont be so fixated with a particular pair, find opportunities elsewhere.Martingale is must stay in Vegas. What happens in Vegas stays in Vegas.

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TEJIRI says

Well, Just when through your chart of last week, thank you. I learnt the diagonal support and resistant lines from your post and chart. I am trying to master the act of price action. Fibonacci will be my focus next weekend

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William Beverly says

Why is it that when posting a new trade, the vast majority of such trades open with negative pip value that is greater than the spread? Rarely have I ever seen a newly posted trade open with a positive (green) pip value.

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sam says

Apart from Gorge Soros, how many full-time forex traders are billionaires?

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Stephen says

Absolutely correct. I am a victim of Martingale system. ANd you are absolutely correct that the end of such system is a blown account.

Please I have a question, Is there anything one need to do in this somewhat volatile market these days.

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sandeep bansal says

everything Justin said about martingale is true to a certain degree but i shall not agree to it completely. In fact, i use the principle in one of my most successful expert ever and it has been netting me decent profits since last more than 30 months. Of course, i am not using martingale as it is, standalone basis, but am incorporating a lot of other strategies along with it before it is allowed to double a position.
So far, in my last 30 months of active usage of my ea using the martingale as a part of it, my account has grown from a mere 2k USD to nearly 50K USD.

Of course, i am deeply thankful to justin for his very good advise, as i use some of his principles in my ea as well and without it, my ea wouldnt be doing as great as it is!!!

THANK YOU JUSTIN

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    Malaysia says

    are u selling or sharing your ea ?

    Reply
      Justin Bennett says

      I don’t use an EA.

      Reply
Laurie says

Justin, how do we move from a 4h/daily swing trade into a position trade with a whole new risk/reward scenario and stop loss strategy?

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Roy says

It’s amazing how people fall for this martingale strategy! good article as always. thanks coach.

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FELIX+GREAT says

Hello Justin,

Good morning, Please I have searched for an article on trading psychology among your articles but I have not seen one. Please could share a thought with us on Trading Psychology. Thank you Sir.

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Daniel says

I did use martingale strategy and am proud of it. I make between $3000-$5000 daily trading with martingale strategy. You have to be patient for a good setup and don’t trade when the signal is neutral. Forget about what people tell you about martingale strategy, patient and strong learning is the key. You won’t go more than 3 bet in a row before you win if you can really study the chart. It took me 3 month to master this strategy and i can tell you i make more than any good experience forex trader. Martingale high risk but you can make it your best strategy, just believe and study the chart and every candles like a book.

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    Justin Bennett says

    Thanks for sharing. However, three months is not nearly enough time to know if a strategy is going to work for the long term.

    Reply
Maniek says

I’m getting scared”and I was interested b4

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Simon Igbinedion says

I partially disagree with your article, I have criticised martingale for a long while until i saw someone who have consistently made money with it for years, infact without martingale or some form of hedging you cannot make money in the market that’s a fact, holding a position in loss is as good as martingale itself , the overall still boils down to your equity. Also that ea is a lazy way or that it doesn’t work i also disagree with that

EA is used to test a strategy for a long period of time e.g 10years, the only way one can truly know the success of his strategy is to test it on a longer condition which can only be done using EA, Any manual trader winning even for five years without a partial Expert adviser management is sure of losing his equity one day. Martingale on the other hand is successful considering the following factors: Knowing when to place the first trade, knowing when to double your lots, your strategic techniques is highly tested using martingale or hedging on like stop loss.

Considering trading with pyramiding method test such method with an EA you will definitely lose your equity because such method is even riskier e.g you place a second buy once the first is winning and protect the first with trailing , 80% of the time where the second ends in loss, the loss in the second is covered by the profit in first. which means in a true profit you are not necessarily winning and in a loss you are 100% losing because of cos you will not always win your first trade .

I have EA that is winning in martingale,price action and hedging and it works because i considered my entry position very important and most importantly my subsequent position is even more carefully planned following my strategy. When you get this right you will always win whether martingale hedging or price action

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