Why the Martingale System Fails Forex Traders Part 1

martingale silverThe Martingale System is a betting strategy that has the gambler doubling his bet after every loss. It was popular in 18th century France before the days of television, where people had little else to entertain themselves with.

Applying the Martingale to a continuous call on heads on a coin toss, the gambler wins the value of his bet if the coin comes up heads and loses his bet if tails appears. The gambler will double his stake every time he has a loss. So starting with a $ 10 bet on heads, and faced with a loss from tails on the first toss, the gambler will bet $ 20 on the next toss, should that lose the gambler will bet $ 40 on the next toss, should that lose the gambler will bet  $ 80 on the next toss and keep doubling his bet after every loss until the coin eventually comes up heads where his bet will be a winner.

Hypothetically of course! Let’s say the gambler won on the fourth throw of the coin. (lose;lose;lose;win) His losses are (lose 10;then lose 20;then lose 40; then win 80) plus the return of his last stake. So with $ 70 of losses the Martingale strategy of doubling up on the losses until a win appeared won back $ 80 for a $ 10 profit. Amazing. A gambler comes out winning, what system could be better?

But what if the losses in a row were infinite? How could the gambler win?

The gambler would eventually win if he had an infinite supply of money. Playing the Martingale, and dutifully doubling up his bet after every loss, he would just need one win to come out in profit. To put it into perspective in money terms starting with a $ 10 bet followed by fourteen consecutive losses and doubling the bet each time,  the 15th bet would be a bet of $ 163 840. What are the chances of that 15th coin toss being heads or tails now? Still 50/50. After 14 attempts your chances of winning with a large stake of money are still 50%. Not amazing anymore.

So by now perhaps you have come to the realization that unless you have unlimited wealth, the Martingale system will take your money first, leaving you with limited funds to place that next bet to win it all back.

On a Roulette table it gets even worse.

Firstly, playing red or black (like heads or tails) on a roulette table has less than 50/50 odds in your favour because of the green zeros, which give the casino (the house) the edge. To make matters worse, or to indiscreetly give the house the advantage, the tables will have a table minimum and maximum amount per bet typically a 1 – 500 spread.roulette2

So with a minimum table bet of $ 10, the maximum table bet will be $ 5000. Using a Martingale against a table maximum bet size is severely fatal to the gambler, even if he did bring a truck load of cash. After 9 losing doubled up bets in a row (the last stake being $ 2 560) the gambler would reach in his pocket to fork out $ 5 120 to continue his martingale strategy. The pit dealer or the pit boss would point to the sign that says maximum bet $ 5000, and the gamblers strategy falls flat. With a handicapped $ 5000 maximum stake on the next bet, the gambler will not be profitable, even if he wins.

”So what now?” you ask?  – ”I know forex traders who trade the Martingale”

Yes, sadly so do we. There is only one trader in the world who can trade the Martingale and that is the Fed. The Federal Reserve of the USA. Not Deutsche Bank, not Goldman Sachs, Soros or Buffet, only the Fed has unlimited funds to trade a Martingale.

So why do so many forex traders crash and burn with it? That is the subject of part two of our Martingale article.

Read: Why the Martingale System Fails Forex Traders Part 2

 

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