“Double when you lose”. This is the simple philosophy of Martingale betting system. Many people think Martingale is the holy grail when they have a lot of money. However, experienced traders totally disagree with it.
In this article, I will explain the Martingale betting system and share my thoughts about it.
What is Martingale betting system?
Martingale is a capital management strategy that doubles trading volume when losing. Simply put, the more you lose, the more your trading volume increases. Until you win, you will get back the total amount lost together with some profits.
In gambling, let’s say on the first turn you bet $1 and lose. Then in the 2nd turn, you will bet $2. In case you lose again, you will continue to bet $4 for the 3rd turn and so on. Only after you win, you’ll be back with $1.
In Forex, suppose that your Stop Loss (SL) and Take Profit (TP) are both 20 pips. In the first order, you enter 0.1 lot. After hitting SL, you lose $20. Then in the 2nd order, you will enter 0.2 lot. If it hits SL again, then you will continue to enter the 3rd order with 0.4 lot. And so on until an order reaches a TP of 20 pips, you will get both capital and profit.
This way of managing capital is favored by many people because of an illusion. They believe that the winning rate will increase after each loss. Therefore, they will bet a higher and higher amount to be able to collect both capital and profit with just 1 win.
In reality, most of them don’t have enough money to double until they win. And the result is their money is all gone in the end.
Distinguishing Martingale with Loss-holding strategy
In Forex, a lot of people are confused about these two methods. Here are some specific examples.
– With Martingale, after you close and lose 1 trade, you will open a new one with more money. You can see an example in the picture below.
Order 1: you open a SELL trade of 1 lot and set a Stop Loss of 20 pips. As a result, the price hits SL. Your SELL order is closed and you lose $200.
Order 2: Place 1 SELL order with a volume of 2 lots and SL 20 pips. The price hits SL and you lose another $400. You continue like this until the 4th order.
Order 4: Place 1 SELL order with a volume of 8 lots. Still set SL and TP 20 pips. The price hits TP and you earn 1600$.
So, after 3 losses and 1 win, you still win $200 in the end.
– Loss-holding is very different from Martingale. This is a type of trading that does not place Stop Loss. The more you lose, the more you enter orders. I have an example in the picture below.
Pic: Loss-holding strategy
You enter the first SELL order with no Stop Loss point. The more the price goes high, the more you SELL with increasing trading volume. Order 2 (2 lots), order 3 (4 lots), and order 4 (8 lots). As soon as the price falls back, your account will be profitable.
You can see more details in this article: Loss-Holding – An Insane Money Management Method In Forex Trading
How to use Martingale betting system in Forex trading
For me, Martingale is a way of managing capital. It’s not a trading strategy. Therefore, to use it, you need a strategy that has been tested for a long time and has a specific winning rate.
In this article, I will use a trading system that I often apply along with Martingale.
Step 1: Forex trading strategy
Use H4 candlestick chart (USD/JPY or NZD/USD) and Trend Magic indicator.
SELL when the red H4 candlestick closes below the Trend Magic indicator. Stop Loss 20 pips and Take Profit 20 pips.
BUY when the H4 green candlestick closes above the Trend Magic indicator. Stop Loss 20 pips and Take Profit 20 pips.
Step 2: Capital management plan
I will use the Martingale betting system for a maximum of 5 orders in a row. My total capital is $720.
I place the 1st order with a volume of 0.1 lots. If I lose, the 2nd order will be 0.2 lots and so on until the 5th order is 1.6 lots.
After any order from 1 to 5 reaches Take Profit, I will return to 0.1 lots.
So I have a Martingale cycle with 5 trades in total. If lose, I will increase the capital for the next order as planned. If win, I return to the starting point.
Step 3: Backtest the system
The main part of this step is to see whether my mentality is stable when using Martingale or not? And this is what I got.
When using the Demo account to trade with unlimited money and a comfortable mind, I always win.
But on the contrary, when using the Real account, I started to feel scared after losing the first few trades. The more money I use, the more fears I have. And all of my fears are gone when I have no money left.
Review the Martingale betting system
Traders who used to trade with Martingale don’t have good results. Burning several accounts is a very common thing. It’s easy to say but almost impossible to use in practice.
I will evaluate the details for you to understand more.
During Forex trading, your account will always be in 5 states
(1) Big loss.
(2) Small loss.
(3) Break even.
(4) Small win, small profit.
(5) Big win, big profit.
So with Martingale betting system, your account is likely to fall into 4 states from (1) to (4). It means you can only win small when you’re right but lose big if you’re wrong. This goes against the trading mindset.
Try going back to the above trading system with Trend Magic and Martingale. If you win in 1 cycle, you will have a profit of $20. But if you are wrong 5 times in a row, you will lose $720 (36 times what you earn). Win small but lose very big.
You may think that with Martingale system, a lot of money and reasonable trading volume, it will be very difficult to lose?
This is only true when you put yourself in an “emotionless” environment. Because if you have emotions, the larger the trading volume, the more afraid you will be. In this market, the more you fear, the more you will be wrong, and the more you are wrong, the more you will lose.
With other capital management methods, when you lose, you still have money to make a comeback. But with Martingale, there is not a single penny left for you to do again.
If you have a lot of money and no emotions when trading, you are a good fit for Martingale betting system. But if you don’t have the above two factors, then stay away as far as possible from this capital management.