The “Gambit” among the Strategies: The effectiveness of using the Martingale strategy in trading

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.

Are you a risk taker?

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 strategy and increase the profit.

All-in!

So what is the martingale strategy?

Martingale system was invented for roulette gambling. The main point of this system is if we bet 1$ on red but the black wins then we bet double on red again. If the black wins again we 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.

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

The Martingale system is a recovery system. It is based on the statement that If the trader’s “bet” wins, 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.

Theory Vs. Practice: so what the martingale system is?

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

Theoretically the strategy looks quite effective, but in practice it’s quite doubtful. Due to the fact that martingale system is very unsustainable the majority of 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 lossmaking deals.

But the problem is that a big lot measurement leads to a big risk and if the trader catches a longstanding trend the trader can lose his deposit.

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 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$.


And this strategy is formed on the meaning that one trade turns the account around.

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

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

  1. The currency pair we’ve chosen was EUR/USD.
  2. The Time frame – 1 hour.
  3. 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.

We do not claim the one we have backtested is the only one possible way to trade Martingale. Feel free to explore different settings while backtesting and pick the one that is completely suitable your trading needs.

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



Type Buy/Sell Offset Lot S/L T/P Trailing Stop
Buy/Sell - 0.10 1000 100 None
Buy/Sell limit 100 0.11 900 200 None
Buy/Sell limit 200 0.12 800 300 None
Buy/Sell limit 300 0.13 700 400 None
Buy/Sell limit 400 0.15 600 500 None
Buy/Sell limit 500 0.16 500 600 None
Buy/Sell limit 600 0.18 400 700 None
Buy/Sell limit 700 0.19 300 800 None
Buy/Sell limit 800 0.21 200 900 None
Buy/Sell limit 900 0.24 100 1000 None

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

Pending buy order menu in Forex Tester

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:

Pending sell order menu in Forex Tester

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 testing.

Martingale strategy execution in Forex Tester

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:

Martingale strategy: set of pending orders in Forex Tester

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

Backtesting results

Market Training set Forward testing
Bull 730 pips 100 pips
Bear 80 pips 220 pips
Flat 457 pips -350 pips

Conclusions

Due to the fact that 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 system didn’t show its worth comparing with the Bullish and Bearish markets. The main disadvantage of the system is that all previous results do not influence on the following ones.

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

Try It Yourself

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

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

To check this (or any other) strategy’s performance you can download Forex Tester for free. In addition, you will receive 19 years of free historical data (easily downloadable straight from the software).



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