Is the Martingale Strategy Suitable for Money Management?
If you really want to do sustainable trading for a long time, your best bet would be to employ strategies and techniques that will help you with money management. Simply put, successful trading isn’t just about increasing your winning trades – it also has a lot to do with minimizing your losses. If you keep losing trades without winning enough trades, you’ll definitely wipe out your account balance before long.
For instance, the Martingale strategy is a controversial yet commonly discussed strategy when it comes to management. After all, common sense says that when you lose a trade, you should probably lower the next amount you invest, just to be safe. But the Martingale strategy doesn’t just follow that advice, it actually does the exact opposite.
In this article, we’ll discuss the Martingale strategy and whether or not it’s suitable for money management.
How does the Martingale strategy work?
At first glance, the Martingale strategy may not make that much sense. It states that after every loss, you should increase the amount to invest in the next trade. You’ll then keep increasing that amount until you finally encounter a win. Only when that happens are you allowed to start over again with the same small amount that you invested in the beginning.
Basically, a Martingale strategy of trading will go like this: you invest $10 and lose the trade. You increase your next investment to $15. You lose the trade again. You increase it again to $20. Finally, a winning trade. The process starts over again, which means you should start your next investment with a smaller amount, say $10 – the same amount you invested in the beginning.
So, how exactly does this strategy work? Why do you have to keep increasing your next investment even if you lose your trades? What’s the logic behind all this?
According to those who practice the Martingale strategy, it works due to the law of probability. The law of probability states that the more times you repeat an experiment, even if it’s a failed experiment, the closer you get to the accurate results.
In other words, when applied to trading, it just means that you can’t possibly lose all the time, so the more losses you have, the bigger your chance of winning your next trade. And since bigger investments also mean bigger returns, a single winning trade is likely to offset all the losses you incurred in all your previous losing trades.
Is the Martingale strategy really applicable to financial products trading?
Probability vs psychology
The Martingale strategy doesn’t just depend on luck to ensure that you come out as a winner.
Actually, from a probabilistic standpoint, this strategy does make some sense. Every trade you enter has a 50/50 chance of resulting in a win or a loss. As true as it is that it’s impossible to win all the time, the same also goes for the opposite. Based on the law of probability, the more you lose, the closer you are to a win. That’s why increasing your trade amount for every loss makes sense in this scenario, because that means that by the time you finally get a winning trade, your profits will be large enough to cover your losses.
However, if you think about it from a psychological perspective, the Martingale strategy isn’t really one of the best money management strategies out there. In fact, it’s arguably the worst strategy out there for any financial products trader, especially for one who tends to become emotional when things get rough.
Nobody likes losing. And losing real money is probably the worst kind of loss. When you encounter a lot of losing trades, it’s only natural if you become scared. You’re just human, and it’s a human tendency to get scared when things don’t go as planned. The thing is, when we get scared, that’s when we tend to make the most mistakes.
That said, winning all the time isn’t healthy either. If you profit from too many trades, you may become overconfident and invest more in your trade. This would mean that even just a single losing trade could easily wipe out all your funds.
It only works for short-term trading
If you really want to implement the Martingale strategy into your regular trading routine, you should take note that it generally only works for short-term trading. It’s much too risky to use for the long term.
Also, you need to have a huge amount of capital to start trading using the Martingale strategy. In order to offset all your losses, you need to come out with a winning trade, with plenty of profits.
There’s no guarantee to the Martingale strategy
Now, keep in mind that just like any other strategy out there, there’s no guarantee to the Martingale strategy. Although probability does say that it’s impossible to keep losing forever, it is still possible to lose enough trades that you end up depleting your entire account. This is especially true if you only have a small initial balance, like many beginner traders.
At the same time, even if you do end up landing a winning trade, your profit may not be enough to offset all the losses you accrued in the past. So it’s best to err on the side of caution when using the Martingale strategy.
Always safeguard your money first and foremost
As a trader, your main goal should always be to safeguard your money. In other words, it’s more important that you don’t lose than you do win. Winning even multiple times in a row wouldn’t matter if you still lose a bigger amount of money.
So if you really want to increase your demo account balance, whether if it’s with this specific strategy or not, your first goal should be to learn how to avoid losing. And if you’re losing, you should probably take a break first.
Unfortunately, this goes against the logic of this strategy. which is to keep increasing your trade amount until you land a winning trade. This means you’re basically throwing away a portion of your money for a chance of eventually making it all back. Although this is somehow backed by science, it goes without saying that it’s still a rather risky strategy that shouldn’t be used carelessly.
Is it possible to trade using the Martingale strategy on Binomo?
Let’s say you’re currently trading on a downtrend using the Martingale strategy. You’re using the 5 minute time interval and you decide to enter 2-minute sell trades.
You could enter sell trades for 3 consecutive bearish candles and observe if they result in a win. If all three of these trades earn a potential profit, that means you can keep on increasing the trade amount for 3 additional sell trades.
In the above chart, you can see how the strategy might work. That said, do know that it’s impossible to accurately predict how the market will turn out. Depending on many different external factors, the trend could suddenly and completely reverse without warning,
Even just the simplest of change in the market could make you lose all your hard-earned money. That’s why, before using this strategy on Binomo, be aware that it carries a huge risk.
Tips for financial products trading using the Martingale strategy
It’s not impossible to use the Martingale strategy to trade on your Binomo account. However, you do need to be extra cautious when using this strategy. Here are some simple tips for creating a simple trading system of your own.
Decide on a set trade amount
Instead of increasing the trading amount for an endless number of times, you can decide right from the start to only use a set trade amount. Let’s say that you have $500. This doesn’t mean that you should already use all $500 to trade using this strategy. Doing that opens you up to a lot of risks, even possibly wiping out your entire account.
For instance, out of $500, you decide that you’ll only invest a total of $200. If you don’t win after investing $200, that’s it – no more trading for this cycle.
Of course, you don’t need to just invest this in one go. You can break it up into several trades. You can begin by trading $70 at first, then $50, then so on and so forth. Again, once you reach $200, it doesn’t matter if you haven’t won yet. You have to stop trading to prevent depleting your entire balance.
Be wary about cycles
Cycle refers to the time frame that you decided on. In a downtrend, for instance, one cycle could mean three bearish candles along the trend. Usually, when prices enter a cycle, the chances of a trend reversal happening are rather high. But since you’re not sure when this is going to happen, your goal should be to earn as much profit as possible before a trend could reverse.
One example is when you’re using support and resistance levels to trade. A trend is always bound to range, reverse, or breakthrough, but it’s impossible to predict when will happen. Luckily for you though, you can use the Martingale strategy to test the direction of the markets.
This is important because while small amounts are easy to let go of in losing trades, it’s harder when you’re already investing larger amounts. That’s why you should have the market direction determined by this point.
You can also use this strategy for longer positions
For traders who prefer staying in longer positions, it’s also possible to use the Martingale system. There are 3 different trades that you can decide to enter: morning, afternoon, and evening.
The first trade, the morning trade, is significantly smaller than the other two because you’re using it to test the markets. The second trade, which is the afternoon trade, is what you use to confirm the prevailing trend in the market. You can adjust the values depending on whether the last one was a win or not. If both trades end in a win, simply enter the evening trade the same way you entered the last two trades.
Should you use the Martingale strategy?
The Martingale strategy is certainly not a perfect strategy, but it does have its advantages.
One, it allows you to have more time to analyze the markets based on how well your trades succeed.
Second, it allows you to test the market direction by trading small amounts in the beginning. By doing so, you’re increasing your chances of landing winning trades.
Personally, if you ask me, I wouldn’t really recommend the Martingale strategy to just anyone, especially to complete beginners. You should only use it if a.) you have a proper management strategy, b.) you’re good at keeping your emotions in check, and c.) you can be very flexible depending on the result of your trades.
Did you learn a lot from this guide? Be sure to let us know in the comments below! And don’t forget, if you really want to learn more, the best thing to do would be to practice strategies yourself using the free Binomo demo account!
Good luck on your trading journey with Binomo!