Imagine an investment that can only have two outcomes, that is, both are equally likely to occur. Let’s call these results A and B. In terms of trading the risk-reward ratio is 1: 1.

Suppose you decide to trade a total sum of € 5 in the hope that the desired result – A – will occur. However, what ultimately happens is that B is produced and you lose.

For the next position, according to the Martingale method, you will increase the size to € 10, again trusting that the A result will occur. If B is repeated again, then you will lose € 10.

Again, the position size doubles and you trade € 20, waiting for A to occur this time to make a profit. The idea is to repeat the trade until A happens, which will make the size of the winning position exceed the sum of all previous losses.

Possible scenarios of our Martingale Trading Strategy:

1️⃣ You win in the first position and get € 5

2️⃣ You lose in the first trade and win in the second. In this case, you lose € 5 first and achieve € 10 the next. The total profit would be € 5.

3️⃣ You lose in the first two positions and you win in the third. In this case you lose € 5 in the first, € 10 in the second, and you win € 20 in the third. The final profit would be € 5.

4️⃣ You lose in the first three operations and win in the fourth. You will then lose € 5 in the first position, € 10 in the second, € 20 in the third and finally you will win € 40 in the fourth. Again, the final profit will be € 5, after having recovered all the accumulated losses.

As you can see with these sequences, when you win a position with Martingale trading you get a profit greater than the losses, something that sounds very good in theory. The problem, however, is that to achieve this you have to risk higher and higher amounts to make a small profit.

In our previous example, we made only € 5, having risked € 40 in just three trades. Imagine if this losing sequence had persisted a little longer.

If you lose six consecutive times, in the previous case, you would risk € 320 to obtain only € 5 of profit. In other words, you risk a loss of € 315 trying to win as little as € 5. The odds of getting a set of losses in six trades are low, but it’s not crazy. In fact, they exceed 1%.

▶ What if your venture capital were € 200 in total? You would be forced to stop the operation with a great loss in your pocket. This is a key problem for the Martingale strategy. Your chances of winning are only guaranteed if you have enough funds to keep doubling infinitely.

This is usually not the case. The most common is that all traders have a capital limit to put at risk. The longer you apply the Martingale method in trading, the greater the chances that you will suffer a long losing streak.