Martingale and Forex Analysis

The Martingale strategy is probably the most well known of all speculative strategies. It's the simplest and has the greatest odds of success. Gamblers, traders and speculators alike learn this in the earliest stages of their education. After the system became popular in the 18th century, gambling houses began setting limits on bets and changing games to favor the house once more. This is why a roulette table has two green spaces - 0 and 00. In most cases, the Martingale Strategy is no longer applicable. Trading limits and the possibility of losing everything, make Martingale a high risk/low reward proposition at best. However, in the forex markets, Martingale Strategy can still be used profitably. Muhammad Hafeez, software engineer at ForexEgg.com, says that, "Using Martingale strategy is profitable in forex markets if risk is managed properly and strategy is followed systematically."

What is the Martingale Strategy?

The Martingale Strategy is a system of betting created by French mathematician Paul Pierre Levy. The system is based on doubling down and relies on a game where there are only two outcomes: win or lose. Each time you bet and win, you bet the same the next time, until the streak ends. Then, when you have a loss, you double the next bet. Each time you lose, you double again until you win. By doing this you ensure that when you do win, you get back all your losses plus a win equal to the original bet. For example, bet one win one, bet one lose one, bet two win two (the one you lost plus the one you won equal two). In this simple example it's easy to see how this system is attractive. It was very popular for a time until the casinos and bookies got wise. By setting betting limits and changing the games they were able to restrict the usefulness of the strategy. The addition of the two green spaces on the roulette wheel was a direct action against Martingale users. The spaces mean there is another possible outcome besides odd/even and red/black.

Why is Martingale Attractive to Forex Traders?

Martingale is attractive for several reasons. The most obvious - it is extremely profitable if the risk is managed properly. Some other reasons are the relative safety of the foreign exchange, carry trades and profitability. The foreign exchange has safety relative to other markets because money very rarely goes to zero. A stock representing a corporation could go straight to zero. If the company goes bankrupt you have nothing. Countries, even if bankrupt, still have value and the support of other nations. The currency still carries weight. Plus, you can lower your risk even more with arbitrage, or carry trades. Each country has its own interest rate, based on the economical outlook of itself and the world, that it allows banks to charge each other. Some are higher than others and it is possible to profit from the differences. In a Martingale portfolio, a country that pays a high interest rate is purchased and one with a low is sold, the account makes the difference until closed.

The number one reason Martingale is attractive to forex traders is its profitability. Martingale is 100 percent profitable. That is, if your pockets are deep enough to withstand a losing streak you are guaranteed to win, but what it will cost to keep playing can often discourage the most aggressive traders. By doubling each loss, the amount risked with each bet grows exponentially. Traders unprepared for a prolonged losing streak can easily find themselves busted.