Using The Martingale Technique In Forex

The martingale strategy is a money management technique that became popular in the 18^th Century by proposing the unlikely possibility of a 100% profitable betting strategy. Invented by French mathematician, Paul Pierre Levy, the idea behind the martingale is simple enough and involves ‘doubling down’ whenever a losing bet is encountered. In this way, the next winning bet is guaranteed to win back all the money lost, plus a little bit more.

Unfortunately, many studies have shown that the martingale strategy is fundamentally flawed since it requires the gambler to have infinite wealth.

Roulette

To see this in action, imagine a roulette player who always bets on red. The player’s first bet of $1 loses so he doubles down and places another bet of $2. That loses again, so he places a bet of $4. Finally, the player wins and receives back $8, thereby making a $1 profit, since he has spent $7 and now has $8.

The problem is that the chances of each spin landing on red or black are the same each time. That means that a long run of blacks would mean the roulette player could quite easily run out of money. After 8 blacks in a row, the player would need to bet $256 in order to win back his money.

You may think that 8 blacks in a row is unlikely, but it does happen. And there is another problem too. Casinos know all about the martingale technique which is why they introduce a table limit (often at the $200 level) and each table is assigned two green numbers (0 and 00). By doing so, they destroy the 50-50 probability of the bet, meaning any money management strategy for roulette is doomed to have a negative expectancy.

Forex trading

In forex trading, the martingale approach is equally as risky. Here, instead of there being two green numbers like on a roulette wheel, traders must pay commissions by means of a spread. Furthermore, although there is no limit to trade size, forex trends can go on for much longer than on a roulette table, which means the martingale strategy can run into trouble even quicker.

To trade with the martingale in forex requires the markets to be perfectly mean reverting (like a 50-50 coin toss) but we know that they are not. Forex markets can go in the same direction for very long periods. 

Adding to losers

Using the martingale in forex therefore requires averaging down so that you are continually adding to your losers. If you but the EURUSD at 1.36 for example and it falls to 1.35 you have to double your stake and go long again. If it goes down to 1.34, the same theory applies. By using this technique you can rack up your losses extremely quickly. And when you have finally used up all your capital, you will face a margin call and be wiped out in just one trade.