Is the Martingale system as effective as the brokers’ tutorials say?
Do you know why the Martingale is not a trading strategy? The Martingale system can the way to minimize the losses and the sure way to lose all your money. The result depends on the usage, so use it correct.
Why is the Martingale system is not the binary options trading strategy?
First, the principle of the Martingale system is not a binary options trading strategy. It’s a money management strategy that can be used in combination with any trading strategy.
The Martingale system is not similar to the trading process. It was developed as a game strategy for casinos. Its author, Mr. Martingale, found that the probability of winning in the "red or black" roulette is 50/50, and sooner or later, red or black will win.
Types of Martingale systems
Classic Martingale: Implies a doubling of the size of a normal investment after every loss until the profitable deal. The profit covers all losses incurred earlier. The effectiveness of the principle may be limited by the maximum transaction limit or a lack of funds on deposit.
Smooth Martingale: Implies an increase of investment in N% (50%, 60%). This is done to reduce the pressure on the deposit. For example, the first investment is $20, the next is $30, and so on.
Average Martingale: Implies the opening of new transactions in case of loss. So, if the trader bought a CALL option, but the price began to decline, he or she can buy a PUT option, using the same principle of the Martingale. Finally, the trader gets the average entry price and the chance of profit.
Reverse Martingale: According to this method, the size of the investment increases by N% until profitable. After the profit, the size of the investment decreases the same percent.
The effectiveness of the Martingale strategy
Let’s consider an example. Imagine we have the upward trend on the chart. We bought a CALL option, but the price started to roll back, and we had to make three losing trades to get a fourth profitable trade. We spent $5 for the first option. The first option’s $5 + the second option’s $10 + the third option’s $20 = $35. In total, we lost $35 after three unprofitable deals.
The volume of the fourth option was $40, which gave us a profit of 90%, or 90% * $40 = $36. Our final result after four deals is $36 profit - $35 loss for three unprofitable options = $1.
Now, suppose we have entered the market during the news and the upward trend began to change in the downward. The chart formed four consecutive bearish candles. Let’s calculate: The first option’s $5 + second option’s $10 + the third’s $20 + the fourth’s $40 = $75, so $75is our total loss for four deals. To buy a fifth option, we should invest $80, according the Martingale strategy.
In this case, profit could be $80 * 90% = $72. So, if we have the fifth profitable deal after four unprofitable deals, we don’t cover our losses: $72-$75= -3.
Hence, the Martingale is not a trading strategy. It’s the way to hedge your money. With it, you won’t win, but you can limit your losses. In our case, we could lose $75, but due to the Martingale system, we lost only $3.
Usage of the Martingale system
It is better to say when it is not necessary to use the Martingale. Firstly, it is not necessary to use Martingale at the release of important news. Secondly, the main enemy of the Martingale is a change of trend, but more often the trend changes with the turbo options, so you should not trade turbo options using Martingale.
Third, don’t use the Martingale system if you don’t have enough money in your account. If you see that you won’t win, it’s better to finish with a small loss than to increase it.
Do you use the Martingale system? What do you think about it? Is it profitable for you?