Martingale Strategy In Forex Trading
Martingale is a trading strategy based on probability theory developed from popular gambling techniques. Martingale strategy can be applied also in forex trading.
Many people judge Martingale’s strategy as a time bomb. Is this an effective way to be used in forex trading? Or is it a time bomb that can hurt traders? This article will review what Martingale, understanding, and examples of its use in forex, along with the risks that occur when using Martingale strategy.
Martingale is a trading strategy based on probability theory developed by Paul Pierre Levy, Joseph Leo Doob, as well as several other mathematicians from one of the popular gambling styles popular in France in the 18th century. The gambling style is done by doubling the bet every time you lose, to immediately close all losses and make a profit even though later only one victory after several defeats.
Martingale strategy can be applied also in forex trading. The rule of this martingale strategy is when you make a lot of transactions and afterward, the price moves in the opposite direction to your desire, then the next transaction still open the position in the same direction by using a lot of twice as much. So when the last transaction profit, then the profit can cover all losses from previous transactions.
Examples of Martingale Strategies In Forex
Theoretically, the application of a Martingale strategy in forex is quite simple. The illustrations can be seen in the following Martingale sample images:
Initially, traders do sell as much as 1 lot with the estimated price will go down, but it turns out after that price rose so that loss as much as $ 10. Furthermore, the trader sells for 2 lots, but the price still rises steadily and creates a loss of $ 20.
When the price reaches the next stage, the trader sells again 4 lots, but the price still increases and the loss increases $ 40, so the trader sells again as much as 8 lots. At this point, if the price reverses down according to the original forecast of the trader, then a profit of $ 80 can be obtained which effectively closes all losses previously experienced while providing a net profit of $ 10.
Thus, Martingale’s strategy can serve as a substitute for Stop Loss in forex trading. Without the need to re-evaluate the previous trading analysis, the trader “keeps on” the price movement until it reaches the point where the price reverses in the desired direction at the beginning of the trading position opening.
Advantages and Weaknesses Martingale’s Strategy
By using the Martingale strategy, the number of lots that opened after a defeat must be 2 times higher than before (the lot number is always 1 step ahead of the previous defeat so that if they win then the previous defeat can be closed at the same time get profit). Seen in theory, price movements will not forever go one way, will experience a reversal so that users of Martingale strategy will win. However, the main problem of Martingale’s strategy lies in the question of “when does it win?” Will you win in step 5, 10th, or 1000th?
The movement of any currency pair can take place in a bearish or bullish trend that lasts very long. Therefore, in practice, Martingale’s strategy requires huge capital. If you only have a mediocre fund and can not survive until the point of a price reversal, then most likely will go bankrupt in the middle of the road.
For this reason, many people tend to be pessimistic about the profit probability that can be obtained by using the Martingale strategy. One of the motivations of mathematicians studying the theory of Martingale is to prove the impossibility of the techniques favored by these gamblers.
For some forex traders, Martingale’s strategy is very interesting because it only needs to win once to cover the previous losses. However, when you will use the Martingale strategy, it must calculate the resilience of the capital until the transaction to which and receive the possibility of funds can still be burned after the account minus for days and repeatedly inject additional funds.