Why the Martingale System Fails Forex Traders Part 2

In Pmartingaleart 1 of Why the Martingale System Fails Forex Traders it was explained how the double your bet after a loss gambling system – more commonly known as a Martingale, is a failed strategy. It is a failed strategy because in theory, you may suffer infinite losses, and to counterbalance that, the gambler would require infinite funds. Even applying a Martingale to stocks and shares won’t work because there are only a finite amount of shares available for distribution regardless of your wealth. Keep in mind the goal is to be profitable, not a fool. Which brings us to the subject of this discussion, a look at the  application of the Martingale strategy, used by failed forex traders everywhere.

Remember, we are talking about gambling here. Not so called probability theory, black swan risk or laws of supply and demand. Pure gambling, in other words binary. On a coin toss the outcome is heads or tails, on a roulette board the outcome is red or black (or green 0;00). There are no other outcomes.

In forex trading the outcome is not defined like a coin toss. The outcome is variable. If the USD moves up against the JPY, the up move only requires a fraction of a pip to be mathematically successful, and a down move of a fraction of a pip to be mathematically unsuccessful. The variable outcome is that we do not know how large the pip movement will be after a fraction of a pip move, nor do we know the timescale till the end of the move. Flip a coin while you are sitting reading this, call it, catch it and read it. Were you right or wrong? Either way, the bet is over.

Forex trading isn’t over like a coin toss. It is a constant ebb and flow of price movement, mostly consolidating, occasionally trending, and always on margin.

  • The first reason a forex trader is at risk is that it is the trader and not the ‘house’ who sets the rules.The trader decides the profit and loss targets, no one else. So whether a trader wishes to Martingale a 1 pip or a 1000 pip risk/reward strategy, it is the trader who decides this.He has no way of knowing whether the pip movement will reach his desired target or not.
  • The second reason a forex trader is at risk is that the trader is gambling on one outcome, one direction, and on one currency only. So the forex trader is not gambling on something defined, like heads or tails, he is gambling on one currency (ie.Euro) on one direction (ie.long) and on one  outcome (Euro strength).The forex trader may be betting on the right currency at the wrong time.
  • The third reason a forex trader is at risk is that the trader’s entire capital allocation will be tied up in the trading account for no other purpose than to keep back funds for the double up Martingale. There is no room for diversification or applying balanced or hedging strategies to protect the trading capital. With the Martingale, the trader is all in.

Consider the next scenario where we place a money (3)Martingale strategy into action on a forex trading account, with a $ 5000 new deposit into a brokers account, and a $110 starting bonus from the broker giving the trader a capital balance of $ 5110.

The trader chooses to trade a martingale on the EURUSD (long). The trader chooses to risk $ 10, doubling each time there is a loss, until there is a win. We are even going to let the trader win at some point. So here goes –  (Trade 1 Lose $ 10,Trade 2 Lose $ 20,Trade 3 Lose $ 40,Trade 4 Lose $ 80,Trade 5 Lose $ 160,Trade 6 Lose $ 320,Trade 7 Lose $ 640, Trade 8 lose $ 1280) so lets stop here and take stock of where we are at.

Thus far the forex trader has had 8 losses and 0 wins. The trader has real losses of $ 2550. The trader has lost 50% of his capital thus far. He has $2560 of his capital left. He has only one option left with the martingale. Play it all. His draw down is 100%. His probability of winning on the 9th attempt is still no better than a coin toss. If he loses all his capital and bonus is wiped out, if he wins he makes $10 profit from where he started. Let the 9th trade work out. The trader wins $ 2560+ the return of his capital $ 2560, equals $ 5120 (or a $ 10 profit).

Consider this if you were following or copying this forex trader:

At the start you had a healthy $ 5110 in capital. After 8 losses you would receive an update to say 50% of your capital has been wiped out. The following day you would be shocked to hear that all your capital had now been allocated to the market, with the proviso, if this loses you have lost 100% of your money, if this wins you make $10 profit, or 1.9% profit on a 100% draw down.

Therefore we conclude our two part lesson as a warning to forex traders on the Martingale as follows:

  • It is ultra high risk.
  • All your trading capital is at risk.
  • It was never designed for forex trading.
  • It works great with OTHER PEOPLES MONEY!

For further reading read our article Farewell to the Banned, Blacklisted, Busted, Binary Broker Scammer 

 

 

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