hat is trading the martingale way and is it worth using in Forex? I will describe the efficiency of the martingale strategy in forex trading.
Supporters and opponents go on the continuous argument if it is efficient to trade the martingale way in the financial markets. There is no definite answer to the question. Traders are divided into two groups: its fans and opponents. Martingale fans believe that if the market is hard to win over as it has no clear, predictable path, they should use this market feature to their advantage.
How martingale appeared and what it is based on
This method was introduced by a French mathematician, Paul Levy, though he did not name it. He developed it as a betting strategy. If the original stake doesn’t yield the desired profits, the gambler doubles the position. He/she is going on in the same way until the victory. When the gamblers make the profits, they should return to the original stake. Traders usually bet one dollar for a game. If they fail, they double the stake – 2 dollars. Next, it is four dollars, eight, sixteen, and so on.
Trading martingale way in the foreign exchange market
Speculators, who use martingale, select highly volatile currency pairs. Especially popular is the pair of the British pound to the U.S. dollar. If you look at the chart, you’ll see that it is quite liquid and volatile. Quite volatile are the pairs, consisting of the euro- the U.S. dollar and the U.S. dollar -yen, although, in USDJPY weekly chart, it is clear that the Japanese yen is sometimes moving for a long time in the same direction.
A market movement is often followed by a counter-movement. A less interesting pair is that of the U.S. dollar to the yen or euro to dollar, but they are also convenient to trade due to low commission fees.
The EURUSD pair features it less often, though it also happens
Take 150 pips each time
Traders, using martingale make profits from a few pips up to a few hundreds, or even thousands of pips. Most traders gain a dollar if they succeed. A quite popular strategy is taking 150 pips. This system will be efficient if a trader doesn’t face a long-lasting trend in the opposite direction. By the way, such a trend is always dangerous when trading the martingale way.
Losing streak or Monte Carlo fallacy
How long can a losing streak last? In a Monte Carlo casino, there was once a record, when a ball had landed on black 16 times in a row. All gamblers were shocked. After that, the ball landed on black another 11 times. Can something like that occur on the exchange? It can! Although roulette doesn’t have any memory, the market has some kind of it.
If you don’t bet on sell or buy all the time, you are more likely to lose your money sooner. Some speculators alternate buy and sell orders. This system hardly provides any advantage over the market.
Time for martingale
When this system is the best to apply? You mustn’t trade during the important news releases, as a long-running one-direction trend can start. I won’t also recommend trading when The New-York Stock Exchange starts working. However, when the stock exchange is being opened, the market can start moving in the needed direction.
Graphic patterns and martingale
Which pattern is the most informative? It may be Head and Shoulders and its inverse version, which are mostly rather efficient. This formation is the easiest to identify in the daily chart. V-like, W-like and U-like tops and bottoms also work out quite well. After a certain pattern is complete, you can start an aggressive market attack. The support/resistance levels also suggest a lot.
In this EURUSD daily chart, there is a clear Head and Shoulders pattern. The left shoulder is marked with the red arrow, the right one – with the yellow one and the head is marked with the blue arrow. The green arrow points to a good level to enter a sell trade.
To beat the market
To beat the market is a natural desire of any speculator. How to do it easier? Most beginners, having learned about the doubled stake, are rushing to enter a trade and ...lose. It is important to be not only aggressive, but patient as well. To increase your chances for success, you should trade the minimum lot of 0.01. If you are going to enter a trade after 150-200 ticks, you may trade a little bigger lot, but you must remember that the more is your trading volume, the more is a potential loss.
Support and resistance
When entering a trade, traders can base on such tools as the support and resistance levels. They slightly increase the chances for success. Identifying the trendline is the simplest type of analysis, but it is quite efficient. It is applied by both beginners and advanced traders.
Martingale or averaging?
Which way to trade will yield the best result? With averaging, the risk of losing all your capital is, a rule, lower than with using martingale. Although, martingale can sometimes help you leave the zone of a deep drawdown with some gains, but averaging can’t.
The interval between trades
How often should you initiate trades? This question is answered by traders themselves.
A loss-free system?
Is this strategy really loss-free? I must say, martingale is, in fact, a loss-free system, but with one provision: if you manage a limit-free capital. Does anybody in the world possess such funds? Nobody! So, you will always risk when trading the martingale way.
A professional approach
Any business must be treated seriously. Before you start using martingale, you should test a few advisors, or you may design one by yourself. Will you put up with a loss in your capital by tens of percent for one trade? And if it is 50% less? If you will use the classical martingale system, you must be prepared for betting your last money in order to regain all losses and make minimum profits.
Expert Advisors and martingale
Is it relevant to apply expert advisors, trading the martingale way. Professionals say, it is relevant. According to specialists, it is good to develop your own advisor with the help of a software designer. However, you can find something appropriate on the Internet as well. A paid advisor won’t always be better than a free one. In the West, it is rather popular to design advisors as well as to sell and to buy them.
Go all the way! A successful one is better
Most traders claim that trading the martingale way should be complete. According to them, you shouldn’t exit the trade if you lose 10% or even 20% of your capital. Moreover, you shouldn’t close the position if you lose much, because it will break the principle of martingale system. It is important to press the market; otherwise, it will press you.
What potential yield are you to expect when trading this way? With relative (!) safety you can count on 3% profit per months. If so, martingale system is less likely to ruin your deposit. Anyway, it is not guaranteed. According to the probability theory, in a few years, the market may lose everything because of you. Can you count on 30% per month? Yes, you can! But if so, you must remember, that losing all of your capital is also guaranteed. It doesn’t matter so much, if it happens in a month, or in a few months.
Fundamental analysis and martingale
Do you need to apply fundamental analysis when trading this way? Of course, you need! You can often identify the trend direction only by means of the news background analysis. Imagine, some negative information is to be published in the USA, and so, it is not reasonable to bet on dollar rise in this context. However, the negative expectations may not meet the reality, and the U.S. dollar can grow stronger in this situation.
Brexit and not just it: waiting for a Black Swan
Traders call a black swan something unexpected that can radically change the things on the exchange. By the way, Brexit doesn’t refer to this definition, because it is expected. It wasn’t also a black swan when the European constitution wasn’t accepted in France and the Netherlands in 2005. At that time, social polls revealed that the citizens of these two European countries wouldn’t support the draft bill. But the ruined towers in New-York are the example of a typical black swan. Crises are also hard to be predicted.
Testing of an expert advisor
Before you start active application of martingale strategy, you should test it on a demo account. Sometimes, it may take you quite a long period of time to test it. Some speculators are testing all the time and they are trading all the time. Which advisor will suit you the best? It may be this or that. You may also need to correct the trading algorithm.
It is a very simple formula, but it the only one that really works on the exchange. According to it, the price can move the equal distance both upwards and downwards. Everything great is simple. You may deny it, but nothing smarter has been invented yet. Can this rule help traders, using the martingale strategy? Yes, it can! It helps speculators draw more or less correct conclusions. As for the criticism of this formula, I must note that trading stocks, for example, is different from currency trading.
The danger of changing settings
Traders like changing the settings both when they need and when they don’t. When you adjust the advisor settings, you must remember that any interference with the software may often result in bankruptcy, rather than in profits. Many advisors are set to perform certain functions. Not everybody knows what functions exactly. When you interfere with the system’s “brain”, you may face negative results. It is especially dangerous for people, engaged with software design. Trading is a kind of philosophy, and as many programmers are not good at philosophy, they seek to exercise in their craft. It will be hardly of use in the art of trading.
Factor of psychology
Following your selected path, you mustn’t deviate from your objective. It is the worst to suffer from big losses, without knowing what to do next. Traders often “break down” at the worst possible moment. What should a trader, who has started with a 100-dollar capital, do? They bet 1 dollar at first. If they succeed, they take the profit and get prepared for the next trade.
If something went wrong, they bet 2 dollars. A failure again? 4! Next, the stake is 8, 16, and so on. At some point, they just don’t have enough money to double the stake, and they need to bet the rest of their funds. And such a deal won’t cover all losses even if it is successful. But still, you need to follow the above system if you’ve started.
Mathematicians in trading
Psychologists are good at trading, rather than mathematicians. But still, martingale applies mathematical approach. Psychologists can pay attention to the traders’ response to a certain event. But when the martingale is applied, you need to stick to simple math logic. You shouldn’t start trading, based on martingale alone; you should also apply fundamental analysis.
Probability of bankruptcy
It is always possible when you trade this way. But still, martingale provides a kind of bankruptcy delay. There are traders, who claim to gain 35%-40% annually and haven’t ever gone bankrupt.
Peer into future
Can anybody do it? Professionals claim that the future will always remain a mystery. All discussions about this just don’t make any sense. Of course, it is not about Brexit or a change in the Fed’s rate.
You don’t need stops!
Stop orders don’t make any sense when trading the martingale way. If traders put stop losses, even at the breakeven, they don’t already apply martingale strategy; rather, it is a version of averaging. And that is another story. It is the worst possible situation when a trader suddenly “breaks down” and exits a series of trades with huge losses.
“Light” version of martingale
In addition to common martingale system, there is its “light” version, when you increase your deposit not by 2 times, but, for example, by 1.5. Some speculators risk and increase each next bet by 10%-20%. Sometimes, the “light” martingale can yield more than a classical version; sometimes, it is less efficient.
Do you need locks?
Some traders like using locks during unsuccessful trading. For example, if you opened positions with the total volume of 0.4 lot and don’t know how to settle down the situation, you can sometimes open the volume in the opposite direction. However, you will still have to somehow exit the lock. You simply can just exit the trade with the same approach. When trading the martingale way you will hardly benefit from using locks.
Trading options is now growing more and more popular. You can use the martingale system in speculating options. If a trader starts doing so he/she must remember that the shorter the option exercise term is, the more they are likely to go bankrupt. Sometimes, traders get very excited about trading options, but the danger of losing their capitals is not getting any less.
Advanced traders think options to be far more risky than direct contracts, and trading options with the martingale strategy is even more dangerous.
Gold or currency pairs? May be stocks CFDs?
Trading with martingale system, you should know that CFDs are not appropriate for this. A stock can drop or surge in price quite sharply. Gold and currency pairs are more volatile instruments.
In gold daily chart the gap is marked with the red arrow. But the price gaps in the gold market are rather rare. In the stock market, price gaps are more often than in the precious metal market. Martingale system is better for trading in the trend than against it.
Conquer the chaos
Sometimes, tossing a coin provides better trading signals than sensible speculation. You can just toss a coin. If it is a head, open a buy position, if it is a tail – a sell one. Of course, such an approach can’t be seriously recommended. But some traders, in fact, have poorer IQ than a coin. Therefore, there is a reason to think about it.
Who avoids martingale?
Most position traders trade in the direction of a strong trend. If you read books on exchange trading, you can find expert comments about trading this way. Professionals either write negatively about martingale or ignore it at all.
Ilan Dynamic 1.6
This robot is rather popular among traders. This expert advisor is often used in trading the martingale way. Let’s study on the example how you can run the expert advisor.
An example of running the martingale expert advisor
If you want to trade the martingale way automated, you can use Ilan 1.6 Dynamic advisor.
How you install it?
1. Install Ilan advisor on your PC. To do it, you need to open the File section in the terminal, next, Open Data Folder, and then, you open the fold MQL4 – Experts. You need to insert there the files, you have downloaded. And, finally, reset MT4.
2. Next, in the MetaTrader settings, you press Server-Settings-Expert Advisors. You also need to tick the option of Allow automated trading.
When you’ve completed all the above recommendations, the Expert Advisor can trade. You need to click it and drag it by the cursor to the chart.
3. To run Ilan 1.6 Dynamic with your settings, you need to enter the necessary parameters, according to your trading system.
You may ask whether you can trade martingale strategy in forex? The absolute majority of advanced forex traders never use martingale. Those, who like extreme, may try to take their chance, but they must always remember that the chance is a very changeable and temporary thing. Everyone, who wants to try, should count on 3% per month. If you want to gain more, you can well succeed, but you will face far higher risks.
I, personally, think it makes some sense to “test” the martingale system on a demo account; you’d better apply it to trading cryptocurrency on a convenient online forex terminal to keep your deposit safe. Please, do share your results of trading the martingale way or ask your questions in the comments below. I will be happy to discuss this issue.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.