Martingale Strategy: A Ticking Time Bomb for Traders?

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.

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:

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.

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.

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.

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.

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.