What is the Martingale Trading Strategy in Forex?
The Martingale trading strategy increases the possibility of winning a trade in the forex market. It is a loss-averse strategy that tries to break even in the market and reduce overall market loss. In our article, we will discuss what the Martingale trading strategy is and how to trade currency pairs with it.
What is Martingale trading?
Martingale trading enables traders to increase their investment amount during losing trades with an expectation that the market will increase in the future, making big profits for them. This theory focuses on the fact that when losing trades are being doubled up after every loss, a single win will even out the entire trade. For example, let's assume you want to trade USD/EUR, which is trading at an exchange rate of 1 right now. You buy a single unit of the currency pair. Shortly after, the exchange rate drops to 0.80, and your trade loses 0.20. Instead of exiting the trade or remaining in the trade with the same position, you buy two more units of the currency pair for 1.6, now having three units at 2.6. This makes the average exchange rate per unit 0.86. You keep monitoring the market, and the exchange rate finally increases to 1.2. You exit the entire trade at this level and get 3.6 for the three units of USD/EUR. Hence, the overall profit you make with the trade comes out to be $1. This is how the martingale trading strategy is used in forex. It helps in avoiding temporary losses in the market by doubling up positions and reaping overall gains.
How does Martingale trading work?
Martingale trading generally works in a situation where there is an equal probability of a profit or loss. Even though the forex market does not assure a 50-50 probability of a profit or loss, it rests assured that currencies hardly ever touch the value of 0. This makes sure that there is always a loss-profit probability while making a trade. Traders can exit the forex market after they have doubled up their positions and brought the average cost of the currency pairs down, making a profit from the increased exchange rates. Or, they can wait longer for the market to increase further without adding up their positions again to make higher profits. In some cases, traders expand their trading sizes significantly to average out the costs. This is the situation where the martingale strategy works and tells traders to wait for the exchange rate to move significantly high before exiting the trade. Let us understand the working behind the Martingale trading strategy with only two outcomes, having an equal chance of occurring. The first outcome will be termed as 1, and the second will be termed as 2, with a risk-reward ratio of 1:1. Assuming you trade a fixed amount of $10, with an expectation of 1 occurring but 2 occurring first, your trade starts bearing a loss. You decide to remain in the trade and increase your trading size to $20, again hoping for 1 to occur. However, again, 2 occurs. Now you are making a total loss of $30. You double up the trade again and trade $40, wanting 1 to occur. You repeat the process till 1 occurs. In this case, the winning trade size is significantly large and exceeds the combined loss of all the previous trades.
Types of Martingales
The Grand Martingale is one of the most popular versions of Martingale. It states that after every trading loss, a trader must add one more extra unit to the trade along with doubling up the trade. This means if you have traded 5 units initially and incurred a loss, you should trade 5*2+1 = 11 trades now. Accordingly, the next trade will be 11*2+1= 23 units if this trade also incurs a loss. In this type of Martingale, a table limit is set. Let us assume that you set a table limit of 500; in this case, the doubling up +1 unit of trade will create a series of 11, 23, 47, 95, 191, 383. After the sixth trade, a value of 767 will be achieved, which is out of the table. Hence, the table limit is reached at 383, and traders should stop doubling up their trades after the sixth trade. This type of Martingale ensures that a string of losses is broken by a win with a net gain exceeding the total losses. In a Grand Martingale series, the net gain will always be equal to the original trade amount plus one more unit for each loss.
The Reverse Martingale is suitable for traders who do not like chasing losses but profit from the series of winning trades. In this, a trader is supposed to double their trading position after every single win and wait for the trade to reverse to its initial amount after every loss. The trade conducts technical and fundamental analysis in the market to understand how far they can carry a winning streak in the market without reaching a table limit. They are focused on avoiding losses at all costs, as a single loss can consume all the previous wins. Hence, losses are reduced and reversed to the initial trade amount and gains are persevered.
The Pyramid Martingale is a type of trend trading variation of Martingale. It focuses on growing the deposit amount by trading along with the current market direction. In this type of Martingale, the series or sequence of the trade size starts over after every win. It focuses on earning at least one unit of profit per win. Hence, the trader decreases their trading size by one unit after every win since they believe that every trade won is one unit more than the last trade lost. This is suitable for traders who do not want to trade huge amounts and chase losses.
Benefits of Martingale trading
With Martingale trading, traders avoid taking trading decisions based on emotions. It is likely for traders to feel scared and want to exit a market when a downturn hits. But the Martingale trading strategy makes them do otherwise. It gives out a clear and simple rule that traders follow and avoid jumping into trends due to the fear of missing out. Hence, all decisions are based strategically and with logic.
Gives Break-Even Points
With Martingale trading, since you double your trades, the winning trade size is big enough to cover the combined losses of all the trades that incurred a loss. This promotes a loss-averse strategy and improves the chances of traders hitting a break-even point in the market. As long as the traders have enough funds to keep doubling the trade, they can eventually reach the break-even level and avoid losses. It works well in both chopping and trending markets as it ensures that a falling market is going to reverse and continue in the uptrend sooner or later.
Martingale trading is flexible as it allows trading at different exchange rate levels with different trading sizes in different markets. It is not restricted to a certain type of currency and works well with all types of pairs: major, minor and exotic it also works in all types of situations like trending markets, choppy markets, ranging markets or reversing markets. Traders can short or long trades with this strategy and enjoy its flexibility of working with all types of market situations significantly well.
Top tips for trading with the Martingale strategy
1. Set a clear stopping point
A stopping point or table limit needs to be set by you in order to have a maximum limit where you stop doubling your trades. This is because you will run out of money at some point and cannot keep going with a Martingale strategy forever. If you do not set a clear stopping point, you will end up in a debt hole with nothing but accumulated losses. Clearly defining where you want to stop before you start by thinking about the maximum amount that you can afford to lose will help you avoid investing more than you can risk. You can also set a time limit for trading so that you do not recklessly place trades at any time.
2. Research Forex Martingale Investing
Before applying the Martingale strategy to the forex market, you should research the trading possibilities in depth. Since you cannot judge trading probabilities in the market with a toss of a coin, it is essential that you take your time to understand the success rate. Look into the currencies and currency pairs to see their historical market momentum and if it is a sound investment to make and monitor the market trends. Apply the Martingale strategy by investing in currency pairs with a higher probability of successful trades.
3. Do not jump into ‘starting big’
Martingale strategies do work best with a large capital, but we suggest not jumping into big trades right from the beginning, especially when you do not have much capital. Apply this strategy only when you have a decent amount of capital to invest if you do not want to risk losing the entire invested sum. Starting small with limited money can also reap successful results if you keep your initial trade low. By doing this, even doubling up on trades will not result in a big trade quickly. Hence, you will be able to make profits through this strategy without getting yourself into a loss-making trap.
4. Keep the number of trades minimum
Always ensure that the doubling up to trades does not exceed more than five or six rounds. Even though the number of trades to double up depends on individual funds and risk. Five or six rounds are enough for a trader to understand whether the market will benefit them in the near future or not. If the trade has been giving losses even after six rounds, there is less probability of the trade spiralling up into a profit-making zone. Hence, it is advisable to stop doubling up on trades and wait on the market after a few specified trade rounds.
How to trade with the Martingale strategy in forex
Identify the currency pair you want to trade
In a trending, ranging, or sideways market, identify a currency pair that you want to trade. Research the currency pair’s historical performance. Choose a pair that has had more opportunities to reap a profit compared to losing outcomes.
Place your first order with the currency pair
After identifying the currency pair, open your first position with an expected profit outcome. It is advanced to open long positions in bullish markets and short positions in bearish markets.
Monitor the market
Right after placing your first order is the time when the actual Martingale strategy comes into play. Start monitoring the market, and if the currency pair’s exchange rate dips, double up your position. Repeat these four or five times (as per your maximum trade limit) until the currency pair price starts increasing again.
Exit the position when profits exceed combined loses
As soon as the currency pair exchange rate starts increasing and nullifies all losses plus reaps net gains, exit the position. This will ensure that you get out of the position with an overall profit from the trade.
Start trading with the Martingale strategy
In order to minimise losses and increase profit probabilities, use the Martingale strategy and lower the average cost of your currency pair investing. With our online trading platform in Australia, you can trade all the popular currency pairs and apply the Martingale strategy to each one of them in falling markets. Sign up for a live trading account or try a risk-free demo account.
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