Effective money management: Martingale or foul play

Martingale: an unreliable friend or a dangerous companion?

We have already considered the main options for safe, democratic money management, but there are quite the same many risky schemes. The problem is that uncontrolled risk is maintained by the goal of maximizing a profit with the result of losing the capital too quickly.

In the financial market, the logic of “one super deal” is no less dangerous than in a casino, but perhaps there is some hidden benefit in it - you just need to be able to use it?

What kind of beast is Martingale?

The strategy has been known under the Martingale’s name since the mid-18th century. Sometimes the wording “D’Alembert system” is found; however, there is no evidence that the famous mathematician is related to this scheme (see Martingale (betting_system)).

The idea is based on probability theory and the principle of returning to the average value. In practice, the increase of the gaming (trading) volume after each losing trade is assumed. As a result, after a long series of failures in the first case of winning (profit), the loss will be fully compensated.

With a positive outcome of the transaction, the volume is not adjusted (see Martingale System).

The roulette of the casino with its bets on “equal chances”: red/black, even/odd turned out to be a fertile sphere for Martingale’s use. In case of failure, the player, as a rule, doubles bets (1-2-4-8-16-32-64) on the same game option, until he wins.

Despite the illusory 100% guarantee of compensation for losses, the method does not give any advantages. A series of losses can be lengthy, losses grow exponentially, and the real capital of a player, alas, is not infinite (see St. Petersburg_paradox).

The risk in the transaction far exceeds the potential profit, as it is just redistributed over time. Bankruptcy comes much faster than a “compensatory” gain.

It was just a few significant wins on the Martingale system in Las Vegas casinos that made it necessary to modify the two-color roulette wheel and add two green zero sectors (“0” and “00”) to it.

As a result, this game received two additional results and regained the negative checkmate-expectation of winning. Most casinos introduced restrictions not only on one-time but also on maximum bets, which destroyed the chances of success.

The way from the casino to the exchange

A surge of interest in risky techniques has emerged with the development of a fast financial market. The idea of ​​a jackpot in a million haunts many beginners, especially those who consider the ability to play cards, such as poker, a guarantee of success in trading. Plus, the “inspiring” popular culture is actively shaping the image of the exchange as a financial “casino” (see Forex Trading the Martingale Way).

It is believed that the Martingale system has an advantage in the financial market - we can conduct a market analysis before opening the first transaction, thereby increasing the chances of success of a potential “chain” of orders.

The value of any stock (theoretically) can drop to zero, which is why only a few people are fond of Martingale on the stock market, which cannot be said about foreign exchange assets that, even in times of crisis, always have a non-zero value.

Forex is especially attractive for strategies with progressive growth in the transaction volume, for example, based on a price pullback. Besides, in currencies, you can earn money on the carry trade and use technical methods to avoid losses.

We remind you: any Martingale system has a negative expected value because it uses the mathematical concept of infinity, which can be applied to real money only in the form of black humor.

In addition, the “pure” mathematics of roulette in trading is complicated by additional losses: with the increase in the transaction volume, the costs of its maintenance (spreads/swaps/commissions) increase.

No forecast can tell how long you will have to keep orders open and how many additional transactions will be required. Alas, money in the Forex casino departs from the account faster than at the same rates in the usual casino.

Those whom we have not yet been able to dissuade from this dangerous tactic should continue reading.

How does a classic Martingale look like?

The simple logic is applied here: after the market goes against an active transaction, another position is opened in the same direction, but with a double volume. It is assumed that during a reversal, such a “strengthened” transaction compensates for current losses. Like that:

We will leave alone the so-called “joy” from the fact that at the fourth step, the market has eventually turned around, and all losses closed. This situation is real, but very close to ideal, and therefore unlikely.

We remind you: the picture to the right of the moment of opening the first BUY order is the market “future” that you DO NOT see after opening another transaction against the trend. Also, you DO NOT see the development of events after the opening of new transactions for the purchase. But the main problem is visible: an increase in the load on the deposit.

Note: the calculation on the diagram is shown in lots, and how much it will be in cash depends on the size of your deposit and leverage. As you know, it makes no sense to use Stop Loss in such a scheme, so the negative is aggravated by psychological stress from the actively growing losses.

Martingale fans, especially those who develop/advertise/sell automatic advisers or strategies with such a scheme, usually declare that such long unprofitable series are rare and need a maximum of 4-5 steps before turning towards profit.

Do not believe it. Areas of a strong trend on Forex are a standard phenomenon, and a rollback cannot always be equivalent, even a strong correction usually does not exceed 50-70%. Alas, the trend against you may be too “long” for your deposit.

But traders, as a rule, are stubborn people, so we offer you less dangerous options.

«Soft» Martingale

Risks are reduced due to corrective positions: we increase the volume not by two times (by 100%), but, for example, by 20-50% depending on the market situation.

Such a scheme (most often secretly!) is used in automatic expert advisors, the strategy of which allows linking lot increase coefficients to the data of technical indicators, for example, Fibonacci or Murray levels. Sometimes it immediately places corrective positions in key areas as pending orders with additional volumes (the “grid” method).

When turning towards profit, loss compensation is slower, but the load on the deposit will be more comfortable.

Martingale with progression

It is supposed to increase the position volume according to the progression method gradually, but without increasing the loss-making positions. The goal is to reduce the load’s growth rate of the deposit.

After a loss, the volume of the next transaction is determined as the sum of volumes of the first and last transactions. If the deal is profitable, the volume does not change.

We close the series of transactions when at least one lot of profit is obtained. But the main problem remains - the more capital is occupied in the current transaction, the higher the risk for the next.

Anti-Martingale or Tricky Pyramiding

We argue against the classic tactics: we increase the lot after a profitable, not after a losing trade. It turns out an excellent alternative to the standard TralingStop scheme (see Anti-Martingale System).

In the calculation, we use the size of the previous profit so that you can choose smaller coefficients.

In practice, it’s done like this:

  • if Stop Loss worked - the volume of the next order (required!) is reduced by two times since the balance is “damaged”, and it is necessary to reduce the load on the deposit at the same level of overall risk;
  • if the transaction was closed by Take Profit, we can afford to double the volume, as additional “operational” resources appeared on the trading account.

It seems to us that this is one of the reasonable Stop Loss schemes - it can be recommended for any money management system.

We remind you: All ideas to avoid losses at all costs draw a trader into a dangerous game over time, in which any of us always has less chance than the market. Martingale should be used only in a stably profitable system that provides profit in any trading conditions. And the current drawdown is just a statistical accident.

Trading robots with Martingale

Be sure to check whether your broker allows the use of Martingale and locking positions (in any form) - there are options when they “catch” the dynamics of orders and block accounts.

Using swap-free accounts in such schemes will significantly reduce the level of swap losses.

We only note the required parameters that should be available for fine-tuning any expert advisor:

  • Lot multiplier (exponent lot, replicator, multi-lot): coefficient for increasing the next transaction volume. Increasing this parameter reduces the range to the general Take Profit when the EA closes the entire grid of orders. A decrease in the parameter leads to an increase in the number and duration of all transactions. The parameter needs to be adjusted to the current volatility. Recommended: 0.5-2.
  • Maximum number of steps (levels, orders): with a small value, the EA will not be able to open the next, possibly profitable order, and will close the grid at a loss. Increasing the parameter raises the load on the deposit. Recommended: 3-10.
  • Distance (step) between orders: a small step opens a lot of transactions with a small profit and is recommended for scalping. An increase in the parameter is necessary for medium-term strategies or weakly volatile assets.
  • Take Profit size: determined by the general strategy.

Positive advisor test results should be for a period of at least two years from the current date; for time frames of H4 and higher, the price history range can be increased.

Those who have been “living inside Forex” for a long time know that the market changes dramatically every 2-4 years, so you should not use long periods for testing and checking these advisors.

A few practical notes

The Martingale methodology is not in demand by serious exchange speculators precisely because for probable (most often, insignificant) profit, it is necessary to risk significant capital, which neither private players nor corporate participants can allow.

Alas, it is almost impossible to convince every trader not to use Martingale, but 1-2 merged deposits will do just fine with this task (we strongly recommend for reading see Forex Trading the Martingale Way, Equivalent Martingale Measures, 4 Ways To Predict Market Performance, Understanding Forex Risk Management).

Let us remind you:

  • in the financial market, the role of current losses is played by the pledge on your open positions - the more open positions, the less available funds;
  • as current losses increase, the moment of margin call is actively approaching - if the amount of available funds decreases to the level set by the broker, your positions will close automatically;
  • in addition to the current loss and the blocking of collateral, it is necessary to take into account the costs of spreads/swaps/commissions, therefore the loss grows faster than with a conventional Martingale.

What is the result?

Martingale is a psychologically tricky tactic, and not suitable for everyone, which saves many deposits from a quick drain. For example, when you have already fallen into such a “trap”, but the market gives you a chance and has already compensated 50-70% of potential losses, then close a series of transactions and start living anew.

The market is not aware of your problems, and it is always better to accept several failures than to continue to lose. Even if you have a successful experience in using Martingale - do not bring the situation to disaster, you will save money, nerves, and self-confidence.

Try It Yourself

In order to try these money management tips or other ones, no need to risk at youк live Forex account. Simply  Forex Tester for free. In addition, you will receive 23 years of free historical data (easily downloadable straight from the software).

This way you can spend as much time as you need to sharpen your money management skills and grow your confidence as a professional trader.

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