Part III. Money Management Secrets / Chapter 1. Martingale Strategy

The Martingale strategy originated from the world of gambling and its essence is so simple that even a child can understand it. For the sake of simplicity, let's "move" to a casino and "play" the most common game there, roulette. For those unfamiliar with roulette, it involves placing bets on either numbers or odds. In this context, odds refer to outcomes like even or odd numbers, black or red numbers, numbers within a specific range, etc. For our example, we're interested in the 50/50 odds.

Let's assume the minimum bet in roulette is $1. The Martingale strategy works as follows: we place the minimum bet on any of the 50/50 odds, let's say black. If the outcome of the spin is the opposite (a red number), we double our bet and place it again on black. We continue this process until our desired color eventually comes up. In that case, we make a profit and reset our bet to the initial value of $1.

It is easy to calculate that the profit from such a series of bets will only be $1, regardless of the number of unsuccessful outcomes, while the bets increase in a geometric progression with each loss. For example, if a red number comes up 6 times in a row, which is a relatively common occurrence in a casino, you would have to risk $64 to win $1. And if it comes up 10 times in a row, you would have to risk $1024. As you can see, in such a case, the bet becomes disproportionate to the potential winnings, but that's precisely the essence of the Martingale strategy.

Casinos protect themselves from losses caused by proponents of this strategy by imposing a maximum bet limit. Therefore, if the maximum bet size in roulette is set at $1024, the next unsuccessful outcome will break the Martingale strategy algorithm and result in significant losses.

Interestingly, the Martingale strategy can be applied to the Forex market with no less success. The essence remains the same: with each unsuccessful trade, the position size is doubled, and a new position is opened. This approach is convenient to use on micro accounts, where the geometric progression of lot size increase will not quickly deplete your deposit for the next trade. However, one of the drawbacks of the Martingale strategy is the lack of sufficient funds to cover the losses. If the size of your deposit does not allow you to double the lot size after another unsuccessful trade, you will incur substantial losses.

The more consecutive unsuccessful trades you make, the lower your profit will be relative to the invested capital, i.e., the return on investment (ROI). With a very large number of consecutive unsuccessful trades, this process becomes absurd - to win a few cents, you would need to risk several hundred or even thousands of dollars. It is worth noting that pure Martingale strategy should not be applied in Forex trading as it will lead to inevitable losses. If it were that simple, all traders would be millionaires. However, it is possible, and sometimes necessary, to incorporate this strategy into an already developed trading system.

In conclusion, it is important to mention that there is a variation of the strategy described above called the "soft" Martingale strategy. The essence of this strategy is that with each unsuccessful trade, the bet is increased by a certain percentage, and with each profitable trade, it is reduced proportionally. This strategy provides protection against rapid depletion of the deposit but does not recover losses as quickly as the classical Martingale strategy.

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