Martingale strategy in Forex trading – What it is and how it works

Although it may seem surprising, some theories about the size of a trading operation are derived from games of chance, specifically from progression systems. That is why in this article we will discover the Martingale strategy , a system based on the size of the positions.

Any ambitious trader will always be looking for a way to improve their trading strategy or technique while novice traders can make the mistake of focusing too much on one component of the strategy and forgetting the rest.

For example, it is common for beginners to worry too much about input signals, which can lead them to neglect other very important aspects, such as:

• A good selection of the financial market in which we want to operate
• A good exit strategy to reap the benefits
• A goal-focused strategy and a suitable psychology for the trader.
• A good assessment of position size

Let’s get started!

You should keep in mind that the Martingale strategy is high risk and therefore not suitable for beginner and untrained traders.

The theory behind this system is quite simple. The Martingale strategy consists of a negative progression system, that is, it involves increasing the size of the position after a loss . Specifically, with the Martingale Strategy, the position size is doubled when a loss is recorded.

The classic scenario of this system is to try to change an outcome when there is a 50% chance of it happening. This scenario has no expectations. You hope to do nothing and lose nothing in the long run.

For this type of 50/50 system there are two schools of thought on how to decide the size of our position.

➨ The first of them, the Martingale strategy, maintains that the size of the position has to be doubled when we lose, thus we will recover what we lost and achieve performance.

➨ The second of these schools, the strategy against the Martingale, argues that the size of the position should be increased when profits are made.

As it is a strategy with a very high risk, it is important to have a good training, to understand the market and be able to analyze it. That is why we have created a Free Trading Master, taught by experts in the sector. You can access the videos whenever you want!

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.

Next, we will explain how a Forex Martingale strategy works and we will see a practical example. The result of a Forex trade is variable because we can define the price level at which we take profits or reduce our loss. By doing so, we set our potential earnings as a fixed amount.

• We sell a lot of EURUSD at 1.18600 and set the take profit 30 pips lower, at 1.18300. In case the market goes in our favor, at that point we will reap the benefits.
• We will mentally set our stop loss 30 pips above, at 1.18900.
• If the EURUSD continued to rise after our mental stop we would lose at that point. The Martingale Forex strategy then invites us to double the risk in the next position. Therefore, we only use a mental stop loss instead of a real stop.

Why do this? Because it would not make sense to close a position and reopen another twice as large. Instead, we open a new one that matches the size of the original at the time of the stop. A) Yes:

• We sell a lot at 1.18900.
• We put a new stop (mental) 30 points above, at 1.19200
• We replace our initial take profit order with a new one to close both trades. The new Take Profit will be 30 pips below our new trade, at 1.18600. In the first position we sold at 1.18600 and in the second at 1.18900. The RSI will then give us a new entry point and we would follow the same sequence again.
  This is a very simple example to give you an idea of ​​how the Martingale method would apply to Forex trading. As we have stated before, this system is very risky because we can chain several losing positions in a row, even more so in a trend market.

The main disadvantage of the Martingale trading strategy is that it plays with your losses, which is generally considered a break from the rules of good money management . It is interesting to compare it with the reverse or anti-martingale strategy (a method often used by traders who follow the trend).

This implies:

Maintain your position size when you lose
Increase the position size once you start to make a profit as the trend builds.

In short, the Martingale trading strategy can be summarized in the following points:

✔️ It’s a small win system most of the time, with a rare catastrophic loss.

✔️ There is a limit to how long you can continue doubling without running out of capital.

✔️ The strategy falls apart if you run into a series of lost trades.

✔️ Exponential increases are extremely powerful and lead to a very rapid increase in risk. Therefore, doubling can result in a position size so large that it is impossible to handle.

In such a scenario, continually increasing the size is unsustainable. Without a doubt, you will be thrown out of the market at a great loss.

If we had a group of traders who used the strategy for a limited period, we would expect to find the following results:

➨ Most would make a small profit because it would avoid major successive losses.

➨ Those who were unlucky would face a significant loss.

Finally, while the results of the Forex Martingale may seem satisfactory, the strategy is too inconsistent to be used on a regular basis.

This method, however, provides some value and is an excellent tool for better understanding the market. If you want to try it, the best way is to start in a risk-free environment. Our demo account can help you find a Martingale strategy that is right for you and that you can practice with without playing real money.