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What is Martingale Trading Strategy and How to Use It

Introduction

When it comes to trading there are no tools that are going to provide investors with perfectly accurate answers. However, aspiring investors cannot lose hope rather they need to increase the process of their information acquisition.

The best way to increase your chances of winning at trading is to get familiar with as many new trading strategies as possible. That way, investors are in a better position to compare and select the best trading options based on their goals.

What is Martingale Trading Strategy?

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Martingale Trading Strategy can seem very much like a radical idea when investors hear about it for the first time. However, rather than drawing a haste conclusion, it is advisable to spend some time and understand all its founding principles before rejecting it altogether.

Martingale Trading Strategy teaches investors to double their entry positions every time they suffer from a loss.

As mentioned before, this type of investing strategy may seem like a bit of advice from induced hallucinations or a fever dream. However, in reality, it does pay off and is worth all the hassle of learning it. Martingale Trading Strategy calls for copious amounts of patience and mental strength.

At the same time, it is possible by allocating a nominated trading fund aside for a particular investing endeavor. It is considered ideal for maintaining a long-term investment position that warrants an augmented payoff.

How does Martingale Trading Strategy Work?

The Martingale Trading Strategy grants the liberty to the investors to decide the future direction of the market. The investors can select the projection about positive or negative development in the market and make their trading decisions on that belief.

As per the laws of probability, there are only two impactful outcomes. The market is going to agree with the assumed position by the investor or it is going to generate losses for them.

If the investors can make the right prediction they will automatically make profits. On the contrary, if they end up losing money, it means that they have to double their investment and give it another go.

To better understand this strategy, investors can take a reference from the Monty Hall Problem. In simple words, the chances of winning keep increasing every time the investor losses money.

However, just like any other trading strategy, there is also an order to this chaos. Therefore, investors cannot let them base their investment decisions on intuition or forces of luck alone.

Origin of Martingale Trading Strategy

Before moving forward and dissecting the basic components of Martingale Trading Theory, the investors must learn about its origin. The story of the Martingale Trading Strategy started in 18th Century France. This was not developed for traders and stock brokers.

On the contrary, this theory has its roots in gambling pits and betting rings. Gamblers used Martingale Strategy to increase their chances of winning in unpredictable conditions.

The probability theory created by Paul Pierre Levy consolidated this ideology in 1934. After gaining legitimacy from mathematicians, investors adopted it to improve their chances of trading.

Levy famously proved that given an infinite source of capital or income, MartingaleStrategy will always lead to profits and success. Eventually, this trading strategy gained legitimacy by Statistician, Jean Ville in 1939, who formally named it Martingale Strategy.

What are the Basic Elements of Martingale Strategy?

Before moving forward, the investors need to get familiar with all the working principles of the Martingale Strategy. Here are some of its basic tenets listed for the benefit of investors:

Loss Recovery

The main objective of MartingaleStrategy is to ensure loss reversal. In most trading situations, investors try to subvert the psychology of confirmation bias. Many traders end up incurring massive losses because they fail to dissolve their positions even after suffering from losses on account of the no pain, no gain mentality.

However, most experienced investors’ advise against it. On the other hand, MartingaleStrategy encourages investors to not only retain but double their trading positions after incurring losses.

Market Measurement

The part where investors are to assess the situation of the market and perform the analysis on the asset is left open. With Martingale Trading Strategy, the investors have full liberty to pick their assets and trading positions based on horoscope and tarot card readings.

However, thus far it has been established that smart investors take the logical root and use tools like fundamentals and technical indicators to find the best investment products. The same rule holds for this trading strategy as well.

Doubling Profits

MartingaleStrategy is not just about making it break even or settling for a small ratio of profits. This strategy encourages the investors to rise above their inhibitions and fears and aim for doubling their bets.

Needless to say that using Martingale Strategy takes nerves of steel and full control over the mind. If used correctly, this strategy can not only help the investors recover losses but ensure that they can generate massive profits for them.

Breakeven Aversion

Breakeven is the last hope for investors who are unwilling to take risks. Investors who are not ready to suffer some sizeable losses are never going to be able to make good profits. The ability to incur losses is not only part and parcel of investing but it is considered a rite of passage.

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Therefore, by practicing Martingale Strategy, investors can train their nerves to keep calm and deal with losses in a productive manner. At the same time, not settle for something as mediocre as breakeven but rather aim for double their profits.

Forex Centric

More than cryptocurrencies, commodities and stocks Martingale Strategy is considered most applicable to Forex trading. This trading strategy has produced better results for currency exchange bets rather than investing. However, crypto and stock investors with a strong risk appetite are not scared to undertake it from time to time.

Contemporary Theories of Martingale Strategy

When the investors are learning about MartingaleStrategy, they are likely to stumble upon some complicated terminologies. To make things easier for the reader, here are some of these terms simplified:

Anti-Martingale Strategy

Anti-Martingale Strategy is like the antithesis of Martingale Trading. This theory implies that investors should halve their trading positions every time they suffer from a trading loss.

Furthermore, another important principle of this trading system is that the investors should double their trading positions every time they amass profits. This trading technique serves as the reversal of the Martingale Strategy and can be useful under select circumstances.

Zero-Sum Game

Zero-sum is a type of Game-theory where the winning chances of one investor are increased by the losing chances of another. It means that for one person to win, someone else should suffer from losses in an equal proportion.

Derivatives are a good example of a Zero-Sum game because they depend on the loss of one trade participant to ensure gains for another. The counterparties in a Zero-sum game can range from two to several million participants.

Binomial Distribution

Binomial Distribution is a statistical probability law that concludes that in a given scenario there are only two possible outcomes. For example, when a person tosses a coin, there is a 50/50 chance that it will land on either heads or tails. Investors can also apply this statistical tool to their trading outcomes and base their trading decisions on this principle.

Priori Probability

Priori Probability is another statistical idea that aims to measure the chances of one event occurring out of an infinite amount of possible outcomes. Each new outcome in the priori probability system is not dependent on the previous one.

It also postulates that the results of every occurrence are random and independent of tangible stimuli. Take the example of a coin flip; every time the coin is set up for a new flip, it is going to reset its probability of outcome to 50/50 regardless of the result from the last flip.

Hot Hand

Hot Hand is a type of trading psychological effect. It entails that when a trader has been experiencing continuous success, he is likely to keep succeeding. This type of psychological effect can make people follow every advice of a designated trader blindly.

It can result in traders losing rationality and proceeding to make decisions despite the lack of empirical evidence.

Recency Bias

Recency Bias is another important psychological insight into the minds of investors. According to this idea, investors can put greater emphasis on the most recent market changes regardless of technical backup.

Game Theory

Game Theory is a mathematical structure for identifying social interactions between competing players. It can be dubbed the science of strategy and technique building. By getting into Game Theory, investors can get an edge over their peers and learn to improve their trading strategies.

Advantages of Martingale Trading Strategy

Even when, Martingale Trading Strategy sounds ridiculous at first glance investors stand to learn a lot from it if they wish to benefit from the following benefits:

Rational Thinking

Martingale Strategy emphasizes the importance of making rational decisions when trading. At first glance, it can seem like an easy way to lose all your trading capital. However, in reality, this trading strategy has its roots in mathematics and statistical reasoning.

Therefore, investors are forced to dig into its smaller components to find more evidence for its practical implementation. In this manner, this strategy helps them to learn and increase their knowledge constantly. Despite, its straightforward approach, this technique can be useful in navigating through complex markets such as cryptocurrencies.

Flexibility

There is a lot of flexibility with the Martingale Trading System. In contrast to Grid Trading, Turtle Trading, and a few other trading strategies investors have more room to breathe. They are not bound by the stringent rules that must be followed religiously at all times to make the recipe work.

Investors with an independent streak can benefit from this trading style that agrees with their trading mindset as well. However, it is possible to have too much of good things when it comes to trading without traditional boundaries.

Breaking Even

One of the most visible benefits of adopting the Martingale Trading Theory is that investors have greater chances of breaking even rather than suffering from losses. In this manner, investors feel more secure than before with other trading strategies that only set them up for guaranteed profits or losses.

The ultimate goal of an investor is not only to make profits but also to gain experience in the market.  Martingale strategy is the type of trading strategy that ensures the safety net for the investors to make room for free thinking and time for deliberation on their trading analysis.

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Ease of Application

The theory has been developed after hundreds of years of human experimentation and extensive studies to be proven. However, regardless of its complex journey Martingalestrategy is visibly easy and simple to understand.

Even grade students and inexperienced traders can learn it quickly and apply it independently. The ease of application of the Martingale system is one of the main reasons for its popularity and mass adoption.

Confidence Building

Most trading strategies train investors to pursue profits at all costs. The incurrence of losses is often seen as the basis to wrap up the trading position and start again. However, the quality of the Martingale System is that it does not demonize the prospect of losing.

On the other hand, it celebrates the losses and teaches the investors to view it as a delayed but increased chance of winning. Rather than detesting losses, the investors who are familiar with MartingaleStrategy learn to brave them on a logical basis and take steps to grow out of it.

Limitations of Martingale Trading Strategy

Just like any other trading system, Martingale Strategy also has its vices. Investors who are planning to apply this method should take a look at the following drawbacks:

Exponential Losses

The most apparent risk associated with Martingale Strategy is that it can extenuate the possible losses by several degrees. No matter how much traders despise the idea but a considerable amount of trading results depend on powers of luck.

Therefore, if an unlucky investor ends up picking the wrong cryptocurrency and they fail to make rational trading decisions, they are going to suffer from the threat of exponential losses. Furthermore, investors can also hurt their chances of recovery or drown in debts by staying on a losing streak on account of the Martingale Trading Strategy.

Marginal Profits

Another harsh fact about Martingale Trading is that most investors end up making small profit margins only. It happens because the profits they are generating are spent on recovering from the losses that they have already incurred.

Therefore, there is a very small percentage of instances where the investors were able to generate a sizeable amount of profits using this trading strategy. In other words, the risk ratio associated with Martingale Trading Strategy is considerably higher than other more analysis-based methods.  

Market Conditions

Martingale trading system only works best in a market that is prone to high volatility. The markets that are relatively more stable and controlled often fail to generate good results with this method. Therefore, most equity investors refrain from using this technique.

However, investors who are only getting started may utilize it sometimes. Another important factor to consider is that Martingale Trading can only produce results for long-term positions and it is not as rewarding for short to medium-term positions in stable markets.

Infinite Capital

As the rule dictates, the given infinite capital investors are always going to win using Martingale Trading. However, the ground reality is that most investors do not have an infinite or sizeable source of capital to keep pouring into trading markets.

It antagonizes the purpose of trading for making more money. A person who is already in possession of large sums of money would not gain anything from placing losing bets and doubling them constantly. However, when used in moderation Martingale Trading can be a useful tool.

Unhinged Trading

The problem with popularizing Trading techniques like Martingale Trading is that it can get a cult following for all the wrong reasons.  Investors who are unaware of the inner workings of statistics, probability, trading, technical analysis, fundamentals, and others are very likely to misinterpret it and see it as a way to make profits quickly.

Since this trading style grants a lot of liberty to investors, it can be misinterpreted as a green signal for unhinged trading practices.

Conclusion

Martingale Trading is proof that investing can be easy to use and understand. However, the apparent simplicity of this trading strategy is the result of a lot of hard work and contemplation behind the scenes.

Therefore, investors should make sure to use it with caution and take measures to manage the associated risks to get the best results.


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Hassan Mehmood (Saudi Arabia)

Hassan is currently working as a news reporter for Tokenhell. He is a professional content writer with 2 years of experience. He has a degree in journalism.

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