The Martingale Method
by Trader Rich
The Martingale Method is not a trading system, it is a money management method, moreover an interesting one. Follow with me because the logic is simple. You can read more about the Martingale Probability Theory here.
Martingale Method I
Assumptions:
- You are using a discretionary or mechanical trading system.
- You know your system well therefore you know how many consecutive losses your system has ever had. For this example, we'll assume your system has had at most 10 consecutive losses.
- You trade 3 lots.
Scenario:
- You have had 10 losses in a row trading 3 lots per trade.
Conservative Martingale Method I Example:
- On your very next trade after losing 10 in a row, increase the lot size to 4
- If this 4 lot trade is a winner, go back to normalcy trading 3 lots. Your done using Martingale for now
- If this 4 lot trade is a loser, increase the lot size to 5
- If this 5 lot trade is a winner, go back to normalcy trading 3 lots. Your done using Martingale for now
- If this 5 lot trade is a loser, increase the lot size to 6
- etc, etc, etc
Keep increasing lot sizes by 1 until you win. I think you get the point.
Martingale Method II
Assumptions:
- You are using a discretionary or mechanical trading system.
- You know your system well therefore you know the average number of losses your system has before turning a winner. For example, we'll say that on average, your system has 3 losses before turning a winner.
- You trade 3 lots.
Conservative Martingale Method II Example:
- You are currently not in a trade. You will wait until your system has 3 consecutive losses before doing anything. You WILL NOT trade.
- Once your system has 3 losses in a row, start trading your system again. Your first trade will be a 3 lot trade.
- If you win, great. If you lose, increase the number of lots to 4.
- Increase the number of lots until you win.
Aggressive Martingale Method II Example:
The only change here would be to enter your first trade with a larger lot size than normal after your system has 3 losses in a row. So instead of just trading 3 lots, trade 4.
Popularity: 5% [?]
In my opinion and from my experience watching many traders trade while this type of method can be very profitable for extended periods of time eventually it always ends in ruin. The reason being that the number of losses your system has in a row has does not affect the odds of the next trade being profitable. Although the odds of each trade may be better than 50/50 its still like flipping a coin where the number of heads you get in a row does not affect the chances that the next flip will be tails, its always 50/50.
The probability of getting a head or a tail on a flip of a coin is 50%, correct. But the probability of getting 2 heads in a row is a lot less, 4 heads in a row much lower and 10 heads in a row much more lower. Anything is possible and you can get 10 heads in a row, but the odds are much lower than getting one head in a single toss.
Read some “information theory” . If you had 9 losses then probability of 9Losses plus 1Win is equal to Probability 9Losse and 1 Loss.
++ David Waring ,
–Disagreed to Trader Rich,
–Forex Trader.