The martingale system, or martingales, in forex is a play on statistics.

Let’s say there’s a 50% probability that a currency pair goes up or down (and we’ll ignore the broker’s spread for now…) – spin a coin and make your trade (place your bet) – you win, great, keep going… You lose? Then double your wager and go again…

The principle of the martingale system involves a single initial bet – every time the bet loses, the wager has to be doubled up so that, given the time and opportunity, a single winning trade will recoup all previous losses and put you back into profit. An apparently 100% forex system.

And, fact is, this would work, (in a hypothetically perfect world).

BUT! You need a large account to start with – if you had 10 losing trades in a row, you’re betting 2¹¹ your initial stake – this is grains of rice on a chessboard territory… The problem occurs when a currency keeps on going in one direction, you very rapidly run out of available funds for the new trades. And currency pairs in the forex market do tend to trend.

Leverage isn’t going to help you here – this can only make the situation worse.

You need nerves of steel – psychologically, are you ready to deal with repeatedly doubling your position while you are losing…

Even though the statistics might say that the system is 100% effective – you’re gambling. Ensuing trades have a massively low reward/risk ratio.

You’re gambling – but not as the House. Never a great recipe…

Although – while forex markets do have the broker’s spread, but also one unique advantage for the martingale strategy. Interest rates allow a trader to offset a percentages of their losses with accrued interest income, ie. trade on currency pairs only in the direction of positive carry.

Originating in the eighteenth century, the martingale was popularized by a French mathematician, Paul Pierre Levy. It’s been used in craps, and the 0 and 00 fields on the roulette wheel were introduced to bust the martingale system – unevening the odd versus even or red versus black probabilities away from .50.

If you want to try the martingales system and see what invariably happens, you can – get a free practice account and give it a go.

3 Responses to “The Martingale System in Forex”

1. Reya says:

   January 26, 2009 at 8:48 am

   The part about the later trades having a massively low reward/risk ratio, is that really so, in that they don’t have same factors involved as a standard trade?

   Since a following trade isn’t independent of any later trades, which under the martingale system, have to be placed bythe forex trader, don’t these have to be factored into risk/reward as well?

   Reply
2. Lewis Wolfe says:

   January 26, 2009 at 9:54 am

   @Reya

   Yes – you’re right, in that each individual trade is part of a system, the risk/reward will be different in the overall picture.

   But then as soon as you place the first trade of a planned martingale system, you are committing to that deal, with all the probabilities and gamble involved – once in, you can’t get out until you win. That increases risk on the very first trade above what it would otherwise be…

   Reply
3. Alan says:

   January 28, 2009 at 7:59 am

   There are auto tools that claim to use the martingale system

   Reply