How to trade with a Martingale Strategy?

Martingale trading is a much-talked-about strategy in the stock market, as it promises a foolproof result to the trader. However, in reality, many traders have simply lost their capital by trying to trade with a Martingale without understanding the risks.

In this article we will present how a Martingale strategy works in trading, with concrete examples, highlighting the benefits and risks of this trading method.

What is a Martingale? Definition and Explanation

A Martingale was originally a betting technique in gambling, which had the objective of achieving a 100% success rate. Its use became widespread in gambling halls in the 18th century, and casinos changed some of the rules of the game to counteract this strategy.

Historically, a Martingale involved doubling the amount of the bet each time it lost. Thus, even after a series of losses, a single winning trade could offset all previous losses and ensure a win.

What is a Martingale in the stock market?

In the financial markets, a Martingale strategy involves increasing the size of your investment following a price movement that is opposite to your position. Specifically, this strategy doubles your position size every time your previous trade loses until you have gains to show for it. The theory is that when you win, you will recover all of the previous losses, with an additional gain.

The trader invests in successive positions of 1, 2, 4, 8, 16, 32, 64, 120, 240...

A Martingale can be considered for any style of trading, be it scalping, day trading, or swing trading.

What does a Martingale Strategy do?

A Martingale strategy is not strictly speaking a trading strategy in the sense that it offers trading signals with entry points into the market to buy or sell. Rather, a Martingale technique is a way of managing your positions and order sizes. Thus, it is more of a money management strategy.

Martingale and the Principle of Downward Averaging

A Martingale strategy consists of lowering the average level of the investment by doubling the size of the trade each time the stock price falls, without closing the previous position. This is called averaging down.

Thus, with each new trade, the average level of the position falls, so that a weaker rebound in price is all that is needed to erase the previous losses.

Disadvantages of Trading with a Martingale Strategy

Martingale trading has two main drawbacks:

✅ The risk-reward ratio gets worse

✅ You need to have a lot of capital to sustain a long series of losses

A Bad Risk/Reward Ratio

One of the disadvantages of a Martingale trading strategy is that the risk/reward ratio is quite bad, but it can quickly get worse.

The risk/reward ratio is the ratio between what you risk and your potential profit. Generally, in trading, it is common for traders to look for ratios of at least 1:1, where the trader risks 1 to win 1, but ideally, it is more recommended to look for ratios of 1:2 or 1:3, where the trader risks 1 to win 2 or 3.

In a Martingale strategy, the trader starts with a fixed 1:1 ratio, which deteriorates as he has to double his position.

For example, in the first example of a Martingale trade, the trader suffers -750 points of losses after the fourth trade, only to win 50. Risking 750 to win 50 is not exactly what you would call a good risk/reward ratio, far from it.

In the case of the downside average, the trader risks up to 1,300 points, to win 250. Again, a very poor risk/reward ratio.

These two examples assume a series of 4 losses. The risk can easily become even greater with a larger loss series. The risk increases very quickly, while the expected profit increases only very slowly, if at all.

Some might object to this by saying that the risk/reward ratio is sacrificed in favor of a trading strategy that has 100% efficiency. This brings us to our second major drawback.

A Martingale Requires Large Amounts of Capital

The second disadvantage of Martingale trading is the amount of capital that is sometimes required to make a profit.

Theoretically, with a Martingale, a trader can win every time. However, if the losing streak gets longer, which can happen in the stock market, the trader may quickly need large amounts of money to continue doubling his position.

Martingale Warning for Beginner Trader.

🚩 The major risk of this method of Forex trading for the trader is that the market will continue in its initial trend for a long time, without reversal, until the trader can no longer react and loses his entire investment.

If a market moves in a trend, without reversal, the trader risks simply losing everything in one trade.

Often traders who abuse Martingale trading have a steadily rising capital curve until they suffer very heavy losses.

How to Build a Less Risky Martingale Trading Strategy?

There are two main ways to build a less risky Martingale trading strategy:

✅ Start with a minimum position size

✅ Use a Semi Martingale without doubling the position

Minimum Position Size

One of the drawbacks of a Martingale trading strategy is that it requires more and more capital as the losing streak continues.

The amount of money needed can quickly exceed the amount of money the trader can use.

To reduce the capital requirements, the trader can start the Martingale with a minimum position size, so that he can withstand a losing streak for a longer period in anticipation of a possible market reversal.

This can help the trader withstand a losing streak longer, but the risk of total loss is still present.

Using a Semi Martingale

A classic Martingale method involves doubling the size of the trading position after each loss. To reduce the risk and the amount of money needed, the trader can choose to use a Semi Martingale, where he multiplies the position size by only 1.5.

In the same logic, it is quite possible to consider a martingale without doubling the position size, but using smaller multiples: 1.4, 1.25, 1.2...

Generally used in long-term unleveraged equity investing, where a long-term uptrend is assumed, investors often seek to average down their investments without multiplying the position size, i.e. with a multiplier of 1.

Thus, when the price of stock purchased falls, it is possible to buy back the same amount of the stock to average it down, in anticipation of a resumption of the long-term uptrend.

What is an Anti-Martingale?

An Anti-Martingale is a Reverse Martingale. In an Anti-Martingale Forex trading strategy, the trader doubles the position size when he wins and halves the position size when the trader loses.

So instead of doubling the position size when the trader loses, he doubles the position size when he wins.

This reduces the overall risk, increasing the risk-taking in the main trend, and reducing the risk in the opposite movements to the trend, as well as having a better risk/reward ratio than in a Martingale.

The Forex Fibonacci Martingale and Pivot Points

Some traders use a variation of the Martingale by using technical indicators, including Fibonacci retracements and Pivot Points.

Instead of doubling the position every time a certain number of points are lost, they use Fibonacci retracement levels or pivot point supports and resistances to re-enter the market.

Tips for Trading with a Martingale

✅ A Martingale is a money management method and not a trading strategy

✅ Don't enter the market randomly but spot a trading opportunity with technical analysis

✅ Start the Martingale with a small position size

✅ Consider a multiplier of less than 2

✅ Set up a stop loss to stop the Martingale if the losing trend continues

✅ Stop the Martingale after a certain number of losses

✅ Practice the trading strategy on a demo account

Robot Expert Advisor (EA) Martingale

Traders looking to automate a Forex Martingale strategy can consider a robot or mql4 EA on the MT4 platform. An Anti-Martingale can also be automated.

It should be noted, however, that robots and EA's are freely available on the MetaTrader market, and no results are guaranteed. Therefore, you should always act with caution and test them on a demo account before considering using them on your account.

Conclusion

Trading with a Martingale is theoretically supposed to offer again in 100% of the cases, but this is at the price of important risks.

If the market moves against you for too long, which can happen at any time, at some point you may not have the capital to continue doubling your positions. This would expose you to very heavy losses, even the total loss of your capital.

It is important to remember that a trading strategy with Martingale is very promising, but as always in trading, and search for large gains is accompanied by large risks.

Therefore, great caution should be exercised by those who attempt the Martingale strategy, as attractive as it may seem to some traders.

If you do not have the experience to understand and control the risks and want to experiment with various trading strategies, the best way is to start in a risk-free environment on a demo account.