The Martingale strategy is actually a gambling strategy. This method was widely known in Europe not long after the birth of the eighteenth century. In theory, this strategy will never lose money.

working principle

In a nutshell: The Martingale strategy is a cost-averaged strategy that practices through “double exposure” loss trading. The result of this is that your average entry price is lower. The idea is that you just double your trading position until fate gives you a profitable trade. At this point, you can make a profit by doubling the effect.

a simple win game

This simple example illustrates this basic point of view. Imagine a 50:50 victory rate game.

Table 1: Examples of simple bets.

I use a $1 gambling investment transaction. Every time I make a profit, I keep the gambling at $1. Every time I lose money, I double the amount of gambling. The gamblers call this a double bet.

If the opportunities are equal, then the end result will benefit me. If I double my gambling every time, the profit will be enough to cover all losses and principal.

Due to the impact of double betting. The bet won is always profitable.

This fact is due to 2N∑= 2N-1 + 1.

This means that a series of consecutive losses are paid for by profit.

If you are interested in trying out the toy system, this is my simple investment game spreadsheet:

a basic trading system

There are no precise binary results in real transactions. The transaction can be either profitable or lossy. But this does not change the basic strategy. You only need to define a fixed rate direction and your point of take profit or stop loss.

The following is an example. I have set my take profit and stop loss to 20 points.

Table 2: Lowering the average of transactions when market prices fall.

I started buying 1 lot at 1.3500. After that, the price reversed to 1.3480 and lost 20 points. I reached my virtual stop loss point.

This is a virtual stop loss because there is no doubt that you should stop trading and create a new position. I keep my current position and add a new position to double the size of the deal.

So at 1.3480, my trading size increased by 1 share. This made my average price change to 1.3490. Now my loss is the same, but I only need to call back 10 points to get the balance, not the previous 20 points.

“Leaning” means double the size of your trade. But you also reduce the relative amount of demand for the balance of payments. This can be reflected in the column “Accounts and payments” in Table 2.

A constant value for the break-even method is obtained by lowering the average by more trades. This setting is infinitely close to your stop loss. This means that you can quickly grab a “market downturn” and make up for the loss – even if there is only one small callback (see Figure 1).

Figure 1: “Leaning average” and remedial measures.

In transaction #5, my average is now 1.3439. When the price moves up to 1.3439, I reach my break-even point.

Once the price reaches or exceeds the break-even level, I can close the trading system. My first four transactions ended with a loss. However, this happens to be offset by the profit of the last transaction.

Last closing profit & loss:

Table 3: Past transaction losses are offset by the profit of the final transaction.

Has the Martingale strategy been effective?

No loss-free trading has been achieved in a purely theoretical Martingale system. If the price moves against you, you just double the size of the trade.

But this system can't exist in the real world because it means an infinite money supply and an unlimited amount of time. Neither can be achieved.

In a real trading system, you need to set up a loss limit system. Once you exceed your loss limit, the trading sequence will stop loss. Then start the loop again.

When you stop the loss limit, it means you have left the real Martingale system. Doing so approximates the use of a system that is prone to catastrophic failure.

Double bet VS. probability of loss

The irony is that the greater your limit of loss, the lower the probability of loss – but the greater the loss. This is the Talibu distribution.

The more transactions you make, the more likely you are to encounter extreme possibilities – a series of losses will make you out.

In Martinel's strategy, the trading risk in the loss series increased exponentially. This means that in a loss trading of a sequence N, your risk increases to 2N-1. So if you are forced to quit early, it will be a catastrophic loss.

On the other hand, profits from profitable transactions only increase linearly. This ratio is half the profit multiplied by the total number of transactions.

Profitable trades always create profits in this strategy. So if you pick 50% of the time (no better chances), the expected total return on your profit would be:

E≈1⁄2NXB

N is the number of "transactions" and B refers to the total profit of each transaction.

But a big stop loss trade will put all of them back to zero. For example, if your limit is 10 double bets, then your biggest deal is 1024. If you have 11 losing trades, you will only lose this amount. The probability is (1 / 2)11. This means that you lose money every 2048 transactions.

So after 2048 transactions:

♣ Your expected profit is (1 / 2) × 211x 1 = 1024

The one-time loss you expected is 1024.

♣ Your net profit is 0

So in your practical system your winning percentage is always at 50:50. This is assuming that the trade you choose is worse than this.

Your risk return is still 1:1. But every loss in your strategy will be a big blow. So it may be worse than you think, especially if you are not lucky!

The Martingale strategy cannot improve your winning percentage. It just delays your loss. See Table 4.

Table 4: Your winning percentage cannot be improved by the Martingale strategy. Your net income is still zero.

Trend followers often think it would be better to use inverse Martingale. Anti-Martingale or Martin Margher tried to do something completely contrary to what was described above. Basically these are trend-tracking strategies for win-win and fast stop loss.

Stay away from "hot" currencies

My experience with the best trading strategy timing is derived from range trading. By keeping your trade size a small percentage of your capital, you use a very low leverage ratio. In this way, you have more room to withstand higher trading multiples when losses occur.

In my experience, the most effective use of the Martingale strategy is as a revenue booster.

Although there are dozens of other opinions. It has been suggested to use the Martingale strategy in combination with positive arbitrage trading. This means a big carry trade pair. For example, use the AUD/JPY long-term trading strategy.

The idea is because of the positive floating interest rate accumulation of large trade volumes.

I have never used this method before. Because the risk is that the opportunities that the currency pair carries are often followed by a stronger trend. These are usually interspersed with exaggerated rectification stages for positioning and closing.

This can happen violently. For example, if there is an unexpected change in the interest cycle, or if there is a sudden change in the appetite of the fund's tendency to stay away from the high interest rate exchange rate.

In my opinion, the risk of being caught in the opposite of these correction errors is too great. For a long time, Martingale's strategy has been struggling in the trend market.

This is also an important communication issue that is worth remembering by many brokers – it is unprofitable to get all but the highest yield arbitrage. Some retailers are no longer actively deferring credit. This is the consequence of becoming the "end of the food chain."

A low rate of return means that your trading size needs to take up more of your capital to get the benefit. As I said before, using the Martingale strategy is too risky.

A more suitable strategy for the trend is anti-Martingale.

Use the Martingale strategy to increase production

As I mentioned before, I don't recommend using the Martingale strategy as your main trading strategy. In order for it to work, you need to have a large loss limit relative to the size of your transaction. If your trading volume occupies a considerable chunk of your trading capital, one of your risks in the downtrend is “bankruptcy”.

The most effective use of the Martingale strategy in my experience is as a yield increase agent. I will describe the strategy that I have used in 3 years. This is done through the flow of a large trading portfolio. By setting a loss limit to 4% of the liquidity and increasing, the total monthly return is about 0.4-0.6%.

The lowest risk trading opportunity is a small range of trading.

For example, in the integration phase I have achieved good results using EUR/GBP and EUR/CHF. In the case of the EUR/CHF intervention policy, a small range of matching transactions may be seen. Similarly, EUR/GBP tends to favor the long-term range of such “fluctuation” strategies.

But you have to be careful about the breakthrough of new trends – paying particular attention to key support or pressure levels.

Paired trading has strong trend behavior, such as the yen cross or commodity currency is very dangerous.

You can download the complete trading system, as described below, in my Excel spreadsheet.

My programmatic trading module, an effective Martingale Strategy Robot (EA), was created by this basic design.

Calculate your loss limit

The best starting point is to determine your maximum risk tolerance. Thus, you can solve other parameters. In order to keep things simple, I will use a power of 2.

The maximum deal size will determine the number of double bets you can use. For example, if the maximum size of your trade is 256 lots, double bets are allowed 8 times. The relationship between them is:

Max lots= 2legs

If you close the last trade when the stop loss is reached, your maximum loss will be:

Drawdown $<Max lots X(X 2stop loss)X lot size

Therefore, based on 256 lots (micro lot) and 40 stop loss, you will be given the highest loss of 2048 yuan (depending on your currency).

Tip: Before you calculate the average number of transactions you can afford – use the formula 2Legs+1. So in this example there are 29, or 512 transactions. So after 512 transactions, you are expected to have 9 losses. This will break the system value.

You can try different transaction sizes and settings using the batch calculator in my Excel workbook.

The best way to deal with losses is to use the ratchet system. So when you make a profit, you should gradually increase your lot and loss limits. For example the table below.

Table 5: Increase the loss limit to achieve profit.

Ratchet is automatically processed in the spreadsheet of the transaction. You only need to set your loss limit to achieve equity ratio.

Warning: The risk capital inherent in the risk of Martingale's strategic trading should not exceed 5% of the account funds. Forexop's Money Management Department can get more details.

Determine an incoming signal

When the price moves a distance above the moving average, I add a short order. When it moves below the moving average, I add a buy order. The system is basically a false breakthrough in trading, also known as "fading / fading out."

In my system, I used the 15-point moving average (MA) as my entry signal. The length of the moving average you choose will vary depending on the trading timeframe.

This is a very simple and easy to implement indicator. There are more complicated ways for you to try. For example, use a Bollinger channel or other moving average. I personally think the easiest way is the best.

Figure 3: Using the moving average as the approach signal.

Regardless of which signal you decide to use, it will indicate that there is a greater potential for a major correction in the direction of the original trend than in the new direction. So the breakthrough movement of decline is what you should strive to achieve.

Set win and stop loss only

The next two points to think about are:

♣ 双 double bet – this is your virtual stop loss point

When you close your position – you “just win”

When double betting – this is a key parameter in the system. A "virtual" stop loss means that you believe that you will continue to oppose you after you reach this point. This is a loser. So double your batch size.

Choosing too small a value can result in a large number of transactions. A value that is too large can hamper the entire strategy.

The stop loss and win value you choose should ultimately depend on your trading time frame and volatility. A lower amplitude usually means you can choose a smaller stop loss. I found the value to be between 20-70 points for most situations.

When to close a position: A transaction in the Martingale strategy should only be closed when the “whole system” is profitable. That is to say, when the net profit of the existing position is at least positive. As with grid trading, when using the Martingale strategy, you need to be consistent and treat transaction settings as a group rather than independence.

A smaller profit value, usually around 10-50 points, usually works best.

There are several reasons:

♣ A small profit level, a larger one may be reached soon, you can profit margins.

♣ Because the transaction volume has doubled, the profit acquisition has become more and more complicated. Therefore, a smaller value will still be valid.

Using a smaller take profit does not change your risk return. Although the profit is lower, the closer the threshold of victory, the greater the win rate.

simulation

The table below shows the results of my 10 rounds of trading in the trading system. Up to 200 simulated transactions can be executed per round. My starting capital is $1,000 and my loss is set at 100%. The loss limit is automatically upgraded or reduced each time the profit or loss changes.

Table 6: Simulation results in a spreadsheet.

My final balance is $1,796, and the total return on the initial amount is 79.6%.

The chart below shows a typical incremental profit model. The orange line indicates a relatively sharp drop phase.

Figure 4: A typical profit record using the Martingale strategy.

The spreadsheet is for you to try. This is just for your reference. Please note that the use of policies in an account is the responsibility of the user.

The pros and cons of the Martingale strategy

Why use it:

♣ It has a well-defined set of trading rules that can be easily tracked or planned as an expert consultant.

♣ It has a statistical calculation of profits and losses.

♣ Apply it correctly to achieve incremental profit streams.

You don't need to be able to predict the direction of the market.

Why avoid it:

The average decline is a strategy to avoid losses rather than seek profits. The Martingale strategy cannot increase your equity. It just delays the loss – for a long time if you are lucky.

It relies on assumptions about random market behavior that are not always valid. Irrational behavior of the market.

The risk is multiplied and the profit increases linearly.

It can increase catastrophic losses in practice because no one has an unlimited amount of money.

♣ Risk and return balance, but since the loss will be a big blow, it may not be accepted.

Martingale's strategy has been used in stock, foreign exchange, futures and other markets for many years. Virtual currency has the same trading nature as it is, so the market for virtual currency Martingale's strategy also applies, and according to the nature of virtual currency. In other words, Martinel can play its role more effectively in the virtual currency market.

The 27 Martinel settings from CoinRobots are sufficient for your trading strategies.