Martingale for Forex. A boon or a bane?

Good day to all.

Welcome to another Koala Forex Education. Learning to trade Forex made simple!

Folks, to make money in Forex is never easy and much work must be done. Today, i will like to explore a relatively straightforward method of betting and to evaluate it's practicability.

Martingale for Forex

Martingale dates back to 18th century France. The idea behind this strategy is that given a random 2 choices, you will eventually hit your choice. Considering this, each losing bet will be followed with a doubled bet. Once the chosen outcome finally hits, you win all your previous loses with a profit.

Example : Heads or tails coin. Capital $100

Bet: Heads $1
Outcome: Tail
Capital: $99
Total Profit/Loss: ($1)

Bet: Heads $2
Outcome: Tail
Capital: $97
Total Profit/Loss: ($3)

Bet: Heads $4
Outcome: Tail
Capital: $93
Total Profit/Loss: ($7)

Bet: Heads $8
Outcome: Tail
Capital: $85
Total Profit/Loss: ($15)

Bet: Heads $16
Outcome: Heads
Capital: $101
Total Profit/Loss: $101

O K .. now that looked easy. Right?

***

With this example, we can see that this strategy may indeed be profitable provided :

• You have an infinite supply of capital
• You will not be forced to exit the strategy prematurely
• Both outcome has equal chance to hit
• Each loss must be followed by a doubled bet
  

A quick glance at the conditions sounds the alarm. Folks you know i advocate proper money management and planning of trades. This is no where near it. Placing it in Forex context, doubling your position size after a loss is risky money management! We do not have infinite supply of capital and the margin accounts we hold complicate things. When Mr Margin Call visits, there goes our positions. We will be forced to exit exit the strategy prematurely. Furthermore, Forex price movements are often trending. This probably disrupts the equal chance of both sides to hit. Simply put, if you are stuck in a bad trade, chances are the price movement will probably be so for some time more.

Let's take a look from the point of view of a scalper with 10 pips of take profit and stop loss. He has a capital of $1000 with a leverage of 1:100.

Bet: LONG
Position: 1 Micro lot
Outcome: SL hit
Capital: $990
Total Profit/Loss: ($10)


Bet: LONG
Position: 2 Micro lot
Outcome: SL hit
Capital: $970
Total Profit/Loss: ($30)


Bet: LONG
Position: 4 Micro lot
Outcome: SL hit
Capital: $930
Total Profit/Loss: ($70)


Bet: LONG
Position: 8 Micro lot
Outcome: SL hit
Capital: $850
Total Profit/Loss: ($150)

Not enough margin to open 16 micro lots!

There you go, a martingale trip cut short after 4 losses. It is probably impossible to employ martingale strategies when on a margin account. You may get lucky and win within 4 trades but we have to agree that in Forex, having 4 losing trades in a row is pretty common.

With the above example, the martingale strategy failed and your losses had been in vain. I do hope that you can see the risk with this example. Money is hard to come by and this is not a way to lose it.

Remember that the 5% of folks who succeed in Forex are people who exercise discipline and proper money management. They do their homework and are aware of the fundamental and technical conditions. Doubling up on losses is never in their style.

Trade Safely.

This article was a reader request.

Martingale for Forex. A boon or a bane?