Estimated reading time: 5 minutes
As the interest to trade binary options grows among traders worldwide, so as they are looking to explore every minute strategy that seems feasible and profitable. One of these strategies is the Martingale system.
Recently, i have seen quite a number of traders using the Martingale strategy as one of their primary ways of predicting the market movement.
The aim of this article is to point out (with reasons of course) whether the Martingale system of trading actually works.
A Martingale is one of the betting strategies that was developed and popular in the 18th Century in the francophone country, France. It was widely used among bettors for the head and tail coin game in the country. Since the coin has a 50% probability of turning up either head or tail in a single toss, this betting system suited the game.
This strategy had the gambler double his bet after every loss so that any one win would cover up all the previous losses plus a profit that is the same as the original betting size or amount.
Apart form the head and tail coin game, this betting system has also been applied to all games that have a 50% chance of either winning or losing like the Roulette, Casinos, Blackjack and others.
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This strategy is widely used by binary traders who use the “Call and Put” type of trading. These types of trading involve predicting whether the current price of an asset will either increase or decease in value after the expiry time. Therefore the Martingale can be safely applied because there’s a 50% chance of getting either a “call or put”.
Here, the trader doubles his investment amount each time he/she loses. For instance, If I went for a “Call” on Eur/Usd and staked $10 on it and unfortunately lost the trade after expiry, i would stake $20 on the next asset. Another loss means that i would have to invest $60 on the next one and so on.
This is done in order to recover past losses and gain money equivalent to the original investment amount.
Take a look at the table below and see an instance of how this strategy works:
|Trade #||Trade Amount||Trade Losses||Next Investment Amount|
The table clearly explains what you should expect from practicing the Martingale Strategy.
It is based on assumption and not a real data.
The table shows a case of an unfortunate trader who has experienced 10 losing streaks without a single win.
If he must recover his losses, then he must stake twice the value of the previous total losses (next Investment amount).
As you can see from the table, it can be pretty dangerous to apply this strategy since its just a gambling strategy. You can quickly get bankrupt if you don’t have enough funds to practice Martingale.
Assuming you trade different assets like stocks, indices and currencies all moving in different directions, you can’t expect to achieve a good result when you apply this strategy. There’s a high chance of accumulating big losses and this can wipe out your entire account unless of course, you have unlimited funds.
Another important factor that plays a role in Martingale is the trader’s emotion. Most traders don’t have the nerves to hold on and wait for the next profitable trade. They’ll be like, “Ah! Will these series of losses ever stop?” Once, you trade by emotion, then you can easily give up even when you’ve accumulated a series of losses.
Martingale trading system is only meant for traders with deep wallets and enough emotional balance to withstand any type of losses experienced. Unfortunately, many traders either do not have big wallets or are affected by emotions and therefore we advice that Martingale should not be used to trade Binary Options.
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Some often choose this strategy believing that it’s an effective money management technique. It is in no way a money management system because you will have to risk even up to 80% of your money to see that you recover your past losses.
An effective money management system in binary options entails not staking more than 5% of your capital on any single trade.
Even if you want use Martingale strategy, you should only do so as your last resort after your sound technical and fundamental analysis have failed you (although not likely).
This is also known as the reverse Martingale. It is a betting style where the trader increases the investment amount after wins while reducing them after a loss. The idea is to help the trader benefit more by winning trades and minimizing losses.
I do not recommend using either the Martingale or its Reverse for trading because trading depends on your level of financial knowledge and ability to predict the direction of the market correctly based on either your fundamental or technical analysis.
Besides, a good trader is supposed to develop a strategy that works for him in 85% of cases and therefore has no need to gamble with his precious funds.
Your Comments and Questions are always welcome. You can tell us your own view about the Martingale strategy.
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