Those who apply the martingale strategy will tell you that it is a more sure cheat to gain profits. You heard it right, 100% sure profitability (or is it not?). Do not just start purring around yet. Learn its history and what it is all about and how to use it to your advantage.
Definition of Martingale Strategy
The martingale strategy basically means that you will be doubling down the entry price each time you make a trade until you achieve profit over your target time. To properly execute this trading strategy, you need a huge backup of cash. Your pockets should be infinitely deep to accommodate trades that will be losses. What does doubling down the entry price mean? You very well know that a trade can result in profits or a loss. When trading using the doubling down method, you simply double the next entry price until you achieve your objective or time target. This strategy is better explained from a gambling angle. It is worth for you to note that the martingale strategy was originally used in the Las Vegas casinos.
The History of Martingale Strategy
This strategy is a creation by the French Mathematician Paul Pierre Levy. Joseph Leo Doob later developed the strategy to make it more robust. The mechanics that are behind this strategy are that if a bet becomes a loss, double the next one and given time, all the losses are recouped. This is possible since every new wager is more than the previous one.
To give you a better incentive, here is an example of the martingale strategy in action. Let us start with a wager of $2 that when it wins becomes $4. Remember that the martingale strategy requires a huge cash backup when starting out. If you started with a $20 the total after the win becomes $24. The next wager is a double of the previous one. So you will wage $4. If it loses, you will be back to $20. The next wage is $8. If it wins you shall be at $28. This is a profit of $8.
What if the last bet is a loss? This is the perfect reason why you need endless money when using the martingale trading strategy. Sometimes, it may take whopping amounts of wagering to recoup losses and make a small profit which is usually the initial betting amount.
If you lost on the last wager, you will be down to $12. The next wager should be $16, but you are only left with $12 so you will wager it all. You will be lucky if it results in $24 since that will be a profit of $4. But what if it is a loss? You will have made an overall loss of $20 with no chance of gaining. You will have run yourself into bankruptcy. This explains why you need endless cash when starting.
Applying the martingale strategy in forex trading
The martingale strategy is used as a mitigation formulae for making a loss when the profit to loss probability ratio is 50:50. As much as the probability in forex trading is dependent on two variables, profit or loss, you can not assume the ratio to be a 50:50. This is because trends can give a relative profit or loss that is higher than the other.
It is a colossal task for you have deep endless pockets that cannot run dry. However note that given time, the martingale can pay off with a single retracement despite how small it can be. So how does the martingale strategy apply in forex trading?
The key idea here is to lower the average entry price. Forex trading trends tend to hold for some time. If it is a losing streak, even a small retracement can make you profit since the average entry point is overly lowered. If an uptrend ensues, you are bound to make even more profits. This way it is easier to hit your objectives even before your time target expires.
The only downside of this strategy is that you need enough capital to purchase sufficient pips to see you through a losing streak. This is in anticipation of even the slightest retracement upwards in order to break even and make profits.
The superiority of the martingale strategy
Unlike other trades such as stocks, currencies cannot go down to zero. A major global economic downtrend will only devalue the price of the specific currency but not to zero levels. For stocks, companies can run bankrupt in a very short time.
The strategy is great if you are not certain when there will be a pullback for you to enter the market. This is when the prices are bullish. You can buy at high prices and if the trend holds, you make huge profits. An immediate downtrend will only hurt your pockets but with deep pockets, profit can be realized with a single trade.
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