Forex Martingale Strategy that Works – A Brief Guide

Finance Brokerage_Education - Experienced · 05 Jul 2022 1.2K Views

Forex Martingale Strategy that Works – A Brief Guide for a Trader

Have you heard of a rather unusual trading strategy, the martingale strategy? This article focuses on a Forex martingale strategy that works and analyzes its mechanism to help you make the most of it.

What is the Martingale Strategy?

Martingale is a specific theory mainly applied in gambling and other business activities such as Forex and stocks trading. Basically, it’s a betting system entailing doubling the bet after each losing trade.
Martingale strategy is all about “double or nothing,” which is an expression you have probably heard at a gambling table.

Martingale originates from the 17th century in France when the rampant upper class gambled with astonishing sums of money.

With its popularity rising, scientists and mathematicians showed interest in it. Finally, Paul Pierre Levy came up with the full-scale martingale strategy as one of the most popular betting systems.

The aim is to sustain losses hoping the first win would pay off all of them and bring you a good profit. If you look at the coin flip, there is a 50:50 chance the coin lands on heads. Betting your $10 on tails, but the coin lands on heads, you have lost.

If you double your stake to $20, another loss doubles up to $40. If you win eventually, the money you will make would cover all your previous losses and even bring the profit.

However, to use it effectively and skillfully, it is not enough to master your idea well and test it in a demo account.

You should have more funds or skillfully plan the management of small positions and the margin level.
Also, the idea itself of martingale betting systems is derived from game theory. However, its implementation as a Forex trading strategy could be particularly profitable.

Implementation in Trading

Let’s suppose that we have entered a short position in an uptrend. And we hope that the price of the instrument will trade south. However, quotes continue to rise, and we remain positioned at an increasing loss.

There are also two approaches here. We can close a losing trade and return it in the same direction, only twice as large. If it’s at a loss again, we do the exact same thing, closing another twice as big a deal.
The second approach consists of not closing your first trade and doubles it in the same pattern as above.
Every trader is well aware that a losing streak of 5 or 6 trades does not mean that seven will occur.

However, we may face greater disappointment when we calculate how much we can earn by adding to the position. The whole martingale strategy is structured so that our risk-reward is 1: 1.

Is there a forex martingale strategy that works 100%?

Forex martingale strategy that works 100% exists only in theory. Also, it might sound very disturbing, but the whole Martingale progression system is all about doubling your losing position.

The theory this strategy relies on is that once a trade is closed, there is a 50% chance it will “go” in our direction. The probability of such a move is indeed increased by trend and sentiment analysis. Consequently, we can assess the greatest possibility of a given situation in the market.

Forex trading strategy
The most successful traders trade to a plan, and may even have several trading plans that work together. It will help you stay focused on your trading objectives, and the less judgment we have to use the better.

An Example of the Forex Martingale Strategy

Martingale system use in currency trading has become extremely popular. It is primarily for traders with a big risk appetite. Here is an illustrative example of the Forex martingale strategy that works.

  • Imagine speculating with 5,000 € on the trading account previously opened with your forex broker.
  • You set a relatively small lot size to limit your risk to be 0.02 lots. Your stop-loss is 5 pips, just like your take profit. In the worst case, you lose (5 x 0.2 €) the sum of € 1 (0.02% of your trading account).
  • You decide to take a long position. Unfortunately, your speculative transaction is losing, and you suffer a loss of € 1. Your trading account then displays € 4.999
  • Having recorded a loss, you decide to go short, but as the Martingale wants you to double the size of your next position with the same stop loss and the same take profit, you risk 2 € for a position of around 0.04 lots.
  • It turns out you won the trade. You recover the sum of 1 € lost and generate 1 € of additional profit.
  • After winning, you return to your original position size of 0.02 lots and repeat the process.

With such risks, you have to lose 13 consecutive trades to end up “ruined” and see your trading account show a balance of 0 €.

In other words, with a trading strategy with a high probability of winning (for example, above 60 % of success) and a risk/reward ratio of 1: 1, by coupling the Martingale, it is very unlikely that you will lose.
If you are looking for a safe, no loss, Forex martingale strategy that works, it could be a tricky pursuit.

However, the system guarantees at least a win on 5 consecutive trades with a stop loss of 20 pips and a take-profit of 20 pips that uses the following sequence of lot sizes proportional to L = (1,2,4,8,16) can be called the “Lossless Martingale Strategy.” Unfortunately, there is no such system that works in the long term.

Trading with Two Outcomes

To grasp the matter better, imagine your trade has two outcomes of equal probabilities. Trader X wants to trade a sum of $50 and hopes for Outcome 1 to happen. But Outcome 2 occurs with the trading loss.

With the implementation of the martingale strategy, the trade size increases up to $100 while we hope for Outcome 2 to occur.

But instead, Outcome 2 takes place, and we lost $100. Since it’s a loss, our trade is doubled. It amounts to $200 now. Therefore, the process must continue until we get to the desired outcome.
According to this, the winning trade size can exceed all losses combined from previous trades. The difference lies in the original trade size.

Like on the stock market, there isn’t a rigid outcome in Forex. Still, there are two main possible outcomes, but the trade will usually close with a variable rate of profit or loss.

Drawbacks of the Martingale Trading Strategy

Martingale theory is used by traders who trade currencies with high interest rates. Such an investor will intend to buy or sell to earn an interest rate, which means buying a currency with a high interest rate and earning interest, thereby selling the currency at a low interest rate.

With a large number of positions, interest can be crucial and can drastically reduce our initial bet and starting position. It all looks very good in the theoretical description.

Finally, you need to have really deep pockets to trade such a system without any hindrance.

You may not have enough capital to complete another transaction after a series of losses. Also, no one guarantees that this one will be the most we assumed and cover the previous losses.

A Summary of the Forex Martingale Strategy that Works

The benefit of using this type of system is a guarantee of 100% efficiency as long as we have endless cash flow. It is a system based on statistics and probabilities, de facto “rigid,” which always assumes a 50% chance of winning trade.

Therefore, we are not looking for an advantage in the market, even if it guarantees greater efficiency. The main drawbacks of this system are the need for deep pockets.

In addition, the person using it must certainly have a great appetite for high risk and a good dose of discipline. Entries must be precise and not random.

It is extremely important to study the market sentiment and trend and pay maximum attention to the analysis of these elements. Why is this so important? Martingale trading itself focuses heavily on trade size and building a progression system which is de facto often used in gambling.

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