I wrote some articles on martingale betting system and even provided an example of using martingale as money management system in trading from my experiences. Of course it made me lose. In this article, we will find the reason while it never works.
Firstly, let me explain what martingale is for those who have never heard about it.
The martingale system is a betting system that is well-known among gamblers. The idea of this system is, if you start betting with a reasonably small amount, and lose it, you can simply continue betting double the previously lost bet until you win.
For example, if you are betting on baccarat and you start with $1 and you lose it, you may lose 5 times in a row. Therefore you lost $1 + $2 + $4 + $8 + $16 = $31 since you doubled the money every time you. Then if you win in the 5th game, while you are betting $32, you will gain $1 profit. It seems like the martingale betting system may result in a steady profit increase over time.
So, what is the problem? Let us imagine if you have 12 consecutive losses you will need $1 + $2 + $4 + $8 + $16 + $32 + $64 +$128 + $256 + $512 + $1024 + $2048 = $4095. That is a large amount of money comparing to the started point as $1.
You may think that it is not possible to lose so many times in a row it is. The risk has always been there and I mentioned about this (risk of ruin) in one my articles. Moreover, as I told you in the beginning, I experienced this myself when I traded with this system as money management.
What about if you have enough money to compensate your losses many times? It seems like the system is flawless this time, right? But do you really think it is worth to bet your large amount of money (maybe thousands) for making $1?
If consider it in term of probability, if you are trading a futures contract, you have 50% that the price will go the same way as your position (long or short). Then if you are stopped from the first position and you find an entry point to open a position again with double lots.
This time, what do you think how many chances for you to win? Someone may think that you chance to win will greater because there is less chance that the price will go against your position 2 times in a row. Actually, the chance in this case is always 50% even you are entering the 10th trade after lost 9 times in a row.
You can fine many experiment of the martingale system, you do not have to lose your money to experiment this yourself. Clever guys learn from other guys’ mistakes.
By Taro
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
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