Martingale Forex Trading
Martingale trading strategies take their roots in an 18th century gambling system pioneered in Europe. The basic premise is that you trade until you succeed, upping the stakes involved in ever marginal trade to account for recouping previous losses. Essentially, the idea is that even assuming a record no better than chance, the likelihood of hitting a winning trade with time increases, and with ever-rising transaction sizes the likelihood of recouping your losses then increases in the same proportion. This is obviously a high-risk strategy and you need deep pockets and nerves of steel to carry it through. However, as a recovery technique for certain trades, it might well be an effective technique to implement into your forex trading.
What You’re Looking For
With this kind of strategy, you’re simply looking for winning trades that have the capacity to deliver substantial enough returns when multiplied by your position size. If transaction 1 yields a £100 loss, this strategy dictates that transaction 2 must make profit+£100, and if that fails by £100 transaction 3 must make profit+£200 in order for this strategy to work. In that respect, unless you want to up the capital amounts which can, of course, be risky, you need to be more adventurous in your trading, perhaps considering riskier opportunities to make up the gap in returns. For this reason, Martingale trading is extremely risky, and therefore best used as a crisis resolution tool.
Which Trader Does This Suit
Martingale trading is suited to the trader who is not afraid of massive risks and has capital to burn in recouping losses. Operating on a small scale as part of a wider portfolio Martingale strategies can be effective, but they can also quickly become a money pit on days when you seem to be having no luck at all. For traders who are cautious, or who have conservative capital building aspirations, this is a definite no-go area. The potential for significant losses and long lasting effects on your trading account is real and threatening to your ongoing trading career, so it’s important to make sure you can afford your losses if you do decide to implement this kind of trading strategy.
Strengths and Weaknesses
The key strength of this system lies in its simplicity and effectiveness. If you get it right, the Martingale strategy can be a good way to string together wins and mitigate the effects of losses. The statistics are on your side, and provided it is traded with a common sense, well-researched frame of mind, you will eventually hit that home run that accounts for all your previous losses. But by far and away the biggest consideration here has to be the risk. You’re effectively going double or quits on every trade, and you simply can’t afford to keep losing on every trade. While the statistics suggest you will eventually win, it’s probably the case that you need to have substantial capital resources and an appetite for extreme risk in order to pull this off successfully.