Forex Martingale Strategy: backtesting the effectiveness

We are here again to make your trading more profitable and for this, we have decided to give the second breath to the Martingale strategy which is so invested in an air of controversial opinions.

Martingale strategy is covered by a lot of different opinions. Some people say that it absolutely doesn’t work and the trader can only lose his deposit by using it.

The opposite opinion consists in that it can be useful but the trader should carefully use certain elements of the Martingale trading strategy and increase the profit in the financial markets.

So what is the martingale strategy?

The Martingale system was invented for roulette gambling. The main point of such a system is if we place the initial bet of 1$ on red but the black wins then we double the next bet on red again. If the black wins again we place the third bet on red but making it double to 4$ and we keep on increasing our positions. And if the black wins again we keep on betting making it double until we win. The size of the initial bet depends on the depth of the stack.

And when our bet wins, our profit сovers all our previous losses including the initial bet.

The Martingale trading strategy is a recovery system. It is based on the statement that if a trader places winning trade, all his previous losses will be recovered by the profit he gained.

But, this aspect requires a big deposit. Without it, the idea of using the martingale system is pointless.

How does the martingale strategy work?

The Martingale system was firstly recommended by French mathematician Paul Pierre Levy. An American mathematician Joseph Leo Doob managed to refute the probability of a 100% profitable betting system.

Theoretically the strategy looks quite effective, but in practice it’s quite doubtful. Due to the fact that the martingale system is very unsustainable the majority of trading strategies in this system is leading down to losses.

Because of keeping on increasing the positions here comes out an illusion that martingale system allows to avoid loss making deals.

But the biggest problem of the Martingale system is that a big lot size leads to a big risk and if the trader catches a longstanding trend the trader can lose his deposit.

Martingale Trading System: Pros and Cons

The Martingale trading system offers both notable advantages and significant drawbacks. On the pro side, the Martingale system can provide quick returns if a trader experiences a series of successful trades. It is relatively easy to understand and apply, making it attractive to novices.

Additionally, due to its inherent nature of doubling down on losses, it allows traders to potentially recoup their losses in one successful trade. On the downside, the system assumes the trader has virtually unlimited capital to withstand a potentially prolonged losing streak, which is not a realistic scenario for many. Moreover, markets often behave unpredictably, and the concept of always eventually winning a trade, upon which the Martingale strategy is based, can prove faulty.

Another significant disadvantage is that it encourages high-risk trading, with potential for significant losses. It’s important for traders to understand these pros and cons before employing such a trading system.

Risk Management in Martingale Trading

Risk management in the Martingale trading system is crucial, as it is inherently a high-risk strategy that can lead to significant losses. Traders double their investment following a losing trade, hoping to recoup the lost amount when they win. This can be sustainable as long as traders have a significant reserve of capital and the Forex market moves in their favor.

To manage the risk involved, traders should consider setting a cap on the number of consecutive losing trades they are willing to endure before stopping.

Additionally, they should only allocate a small portion of their total capital when using the Martingale strategy, reducing potential damages from a potential losing streak.

It’s also important to diversify their investment portfolio and use other less risky strategies alongside the Martingale system.

Finally, traders should always maintain a robust understanding of the Forex market and the assets they’re trading, as a sudden significant market shift can lead to substantial losses.

What is the Anti-Martingale System?

The Anti-Martingale system is a method of investing that contrasts the traditional Martingale strategy. Rather than doubling down after a loss, an Anti-Martingale strategy entails doubling down after a successful trade, and reducing the position size following a loss. This way, the strategy capitalizes on winning streaks and cuts losses short during a series of losses.

In other words, the Anti-Martingale system seeks to invest more heavily in trades that prove profitable, and reduce investment in trades that result in a loss. While this approach does not guarantee profits, it promotes the risk management principle of ‘let your profits run and cut your losses short’.

However, it’s crucial to note that like any other trading system, the Anti-Martingale strategy also comes with its own set of risks, and a strong understanding of the market and disciplined implementation is key to success.

Martingale System in Forex Trading: Heads or Tails

To describe the main point of the martingale system we can draw an analogy between the martingale trading and a simple flipping of the coin. Imagine that we are flipping the coin betting what side will win either heads or tails with a starting wager 1$.

There’s an equal probability that a coin will land on heads or tails and each flip is independent. Here is a conclusion that all the previous flips do not impact the outcome of the next flip.

And as long as you stick the same directional view each time you would eventually, given an infinite amount of money you can see the coin landing on heads and it covers all your previous losses, plus 1$.

Martingale trading is formed on the meaning that one trade turns the account around.

To get authentic results of backtesting we have tested Martingale strategy on Bullish, Bearish and Flat markets for two periods of time each using 5-steps plan of backtesting the strategies.

The idea is simple – first we make 50 trades at the Training set, then during another period we perform another 20 trades and compare the results. This way it should make backtesting the Martingale strategy faster

Market Training set Forward testing

• Bull 01/03/2011 – 23/06/2011 09/06/2010 – 10/08/2011
• Bear 01/01/15 – 27/03/2015 01/09/2014 – 27/10/2014
• Flat 01/09/2016 – 08/02/2017 04/05/2015 – 12/06/2015

Technical Information

The currency pair we’ve chosen was EUR/USD.

The Time frame – 1 hour.

To avoid losing the deposit, we used the pending orders to close the positions when they reach the stop loss and take profit levels. Besides we set the spread at the minimum meaning – 3.

Market Pending order type

Bull Buy

Bear Sell

The pending orders set includes 10 deals. The lot on the first position was 0,10; the Stop Loss – 1000; Take Profit – 100; Offset – none.

* Please, note: there are numerous types of Martingale system invented by the traders exploring the main idea (with lot multiplying after the loss), but with various additional settings included in the trading method.

We do not claim the approach we have backtested is the only one possible way to use the Martingale strategy in Forex trading. Feel free to explore different settings while backtesting and pick the one that is completely suitable for your trading needs. The Martingale strategy can be used with multiple currency pairs on different timeframes, while settings and parameters can be adjusted accordingly. On top of that, an anti Martingale system could be a reasonable alternative for the trading strategy.

As you can see on the table below this how we put all the settings for our trades.

Let us show you how the pending order menu looks like.

And the same way we set the pending order on the Bearish market but with the “sell type” of the pending order.

Sell type of pending order on the Bearish market looks like:

And on the third market, the Flat market we’ve set the “buy” type of the pending order.

Let us show you how we start the testing using pending orders.

We press the combination of Ctrl+O buttons and choose the buy type of pending order as you can see on the table above. Then we press the button “place orders” and continue simulating Forex trading on historical data.

As the position closes at the Take Profit level we take away the pending orders and continue testing from new candle. At this moment we set one more group of pending orders and continue testing.

Just take a look:

Then we keep setting pending orders until all our positions will not close.

Martingale strategy backtesting results

Conclusions

Due to the fact that the Martingale system is quite risky and unstable it is possible to use this system on Bullish and Bearish markets and gain the profit. Pending orders allow the trader to close the positions and prevent losing the deposit.

As we can see the results on the Bullish and Bearish markets disprove the statement that martingale strategy is absolutely detrimental.

On the Flat market the Martingale system didn’t show its worth compared with the Bullish and Bearish markets. The main disadvantage of the Martingale trading strategy is that all previous results do not influence the following ones. As an alternative, traders could backtest an anti Martingale system to compare the results.

To sum up, Martingale strategy is not the most reliable strategy. To trade successfully using Martingale strategy, a trader has to have a big deposit and to be very careful with increasing every upcoming position.

Try It Yourself

As you can see, backtesting is quite a simple activity in case you have the right backtesting tools.

The testing of Martingale strategy was arranged in Forex Tester with the historical data that comes along with the program.

To backtest trading strategies performance, you can download Forex Tester for free. In addition, you will receive 22 years of free historical data (easily downloadable straight from the software).