# The Martingale Strategy

Imagine a trading strategy that is practically 100% effective . Exists? Yes, and it has been used since the 17th century. This strategy called Martingale (or martingale) is based purely on probability theories, and if your account is large enough to put it into practice, its success rate is close to 100%.
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Updated: Aug 24, 2022
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The martingale strategy was widely used in casinos and therefore now casinos have minimum and maximum bets along with other rules that greatly limit the use of martingale. The problem with this strategy is that to achieve 100% success it is necessary to have a very high source of capital, and when I say very high I mean really high, which can mean in extreme cases a practically indefinite or infinite source of capital. Unfortunately, nobody has infinite economic resources and a single losing operation, as we will see, can lead to bankruptcy. It should also be noted that the amount risked relative to the potential profit is really large. The martingale strategy is, therefore, a VERY HIGH RISK strategy and practically not recommended for 100% of retail traders. However, there are some things that can be done to increase the probability of success of this strategy.

## I.What is the martingale strategy?

The martingale was introduced by the French mathematician Paul Pierre Levy and became very popular in the 18th century in the betting world. The strategy is simply based on doubling down after a losing trade. Most of the theoretical work on the martingale was done by Joseph Leo Doob, an American mathematician interested in achieving a 100% return on this strategy.

The mechanics of the system naturally involve an initial bet; every time the bet is losing, the bet is doubled consecutively until we have a winning operation. Having been successively doubling after losing trades, the result of the winning trade recovers all previous losses and adds the profit of the initial bet. The introduction of 0 and 00 in roulette is used to break the mechanics of the martingale, along with the minimum and maximum bet.

To understand the fundamentals behind the martingale strategy, let’s take a look at a simple example. Suppose we bet “heads” in a coin toss betting game, our initial bet is €1. There is an equal chance of the coin landing on either the heads or the tails side, and each toss is independent, meaning that the outcome of one toss does not affect the outcome of the next toss. With an infinite amount of money, you can keep doubling your bet until it comes up heads and recover all your losses, plus €1 in profit. The strategy is based on the premise that only one winning trade is necessary to accumulate net profit.

Martingale Examples

50/50 the face/cross

Suppose you have a total of €10 to bet and parts of a first bet of €1. You bet heads, in the first round it comes up heads when you toss the coin, you win €1 and your capital goes up to €11. Every time you s쳮d you keep betting the same amount, €1. The next throw is tails, so you lose the amount of €1 and your capital returns to €10. On the next bet, we bet €2 in the hope that if the coin comes up heads, we will recoup previous losses and add a net win. Unfortunately, tails come up again and we lose another €2, bringing the total net worth to €8. According to the martingale strategy, in the next round we will double the bet with respect to the previous bet, we now bet €4. Luckily, the next expensive room launch and we win €4, recover all losses and add €1 profit, our net capital goes up to €12.

Let’s see what happens when we have a longer losing streak as in the following case:

As before, we start with a capital of €10. We start betting with €1. We lose in the first round, passing our account to have a balance of €9. We double down on the next round, lose again and end up with €7. In the third round our bet is already €4, the losing streak continues and we lose again leaving our account with €3. We no longer have enough capital to double the bet, the best we can do is bet everything; we bet the €3 that we have left, we have a losing operation again and we are left with zero euros , we have lost everything.

## II.Apply the martingale to trading

### Why does the martingale work better in Forex?

One of the reasons why the martingale strategy is so popular in the forex market relative to the stock market is that, unlike the stock market, it is virtually unlikely that the exchange rate of a currency pair will reach zero. . Publicly traded companies can go bankrupt, countries can’t (with a few exceptions, of course). There will be times when a currency devalues, but even in cases where there is a sharp decline, the value of the currency does not go to zero. It’s not impossible, but what it would take to make this happen is too much to consider.

The FX market also offers a unique advantage that makes it more attractive to traders who have the capital to pursue the martingale strategy. The ability to earn interest through rollover allows traders to offset a portion of their losses with interest income. This means that a shrewd trader following the martingale will only do so on currency pairs in the sense of positive rollover. With a large number of lots, the interest income can be very significant and would drive down the average entry price.

## III.The Risk of the Martingale

The martingale strategy may seem very attractive to some traders but I have to strongly emphasize that extreme caution is needed for those who try to practice this type of trading. The main problem with this strategy is that many times you can destroy your account before you can make a profit – even before you recover your losses. You have to ask yourself if you are willing to lose most of the capital of the account in a single operation. Considering that the martingale offers a very high risk:reward pattern, many people think that the martingale strategy is totally unacceptable.

Sources & references
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James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.

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