There are quite a few people out there that hail the martingale system as a fool proof way to get rich on the forex market. Many times, they are also selling some type of e-book or similar that they promise will help you iron out the kinks and understand exactly how to employ the martingale system when trading in currencies.
The problem is that the martingale system is by no means a fool proof way of taking the risk factor out of currency trading. Believing that you have found a way of avoiding long-term losses can lead you into making trading decisions that you wouldn’t have made otherwise, and it can end up costing you your bankroll. If leveraged trading is involved, it can cost you even more and damage your economy for years to come.
The best way to protect yourself against situations like this is to be knowledgeable. That’s way we are going to take a closer look at the martingale system and what it is.
What is the Martingale Betting System?
The Martingale Betting System is a betting system developed for bets that pay 1:1. The idea is that after each loss, you double the size of your bet. That way, if you win, the win will be large enough to cover your losses and give you a small profit. If you want to continue betting after a winning bet, you simply start over again with any size bet you want.
Since the Martingale Betting System was developed for bets that pay 1:1 it commonly associated with casino games such as Black Jack. At the roulette table, it is not unusual to see gamblers using the martingale system for bets on Red/Black, Even/Odd or High/Low.
- You bet €5 on Red at the roulette table. You lose.
- Since you lost, you double your bet size. You bet €10 on Red. You lose.
- You need to double again, since you lost. You bet €20 on Red. You lose.
- You double the bet size to €40 and bet on Red. You win! The dealer gives you €40 since a bet on Red pays 1:1.
You have lost a total of €5 + €10 + €20 = €35.
You have won a total of €40.
You have made a €5 profit.
Using the Martingale Betting System is risky, an even a fairly short streak of losses will bring your bet size up to huge amounts. At the roulette table, you can easily reach the upper betting limit for the table without having recuperated losses. If you are using the Martingale Betting System for your forex trade, you can quickly empty your bankroll without having recuperated your losses.
This is how quickly the amount of money risked will escalate if we start at a mere €10:
As you can see, it doesn’t take many steps to get your from €10 to almost €50,000.
Last but not least, the Martingale Betting System was never created with Forex Trading in mind. Many successful forex traders make numerous small profits rather than earn 1:1 on money risked. It is very unusual to find currency market situations where you can be guaranteed a 1:1 payout if you win. Also, the currency market tends to move gradually and follow trends quite a lot of the time, rather than switch back and forth between two binary options like Red/Black on the roulette table. With the Martingale system, you will empty your bankroll if you are caught in a adverse trend, and when you find yourself in a profitable trend, the system will hold you back since it has no built-in mechanism for increasing bets during profitable streaks.
One possible alternative is using currency-based binary options instead of purchasing currency directly. With binary options, you know beforehand how much the option will pay if it expires in the money, so you can seek out options that pay 1:1 or better. However, binary option sellers rarely offer 1:1 payments for scenarios that are like the Red/Black one on the roulette table. Rather, the statistical risk of you losing your money on a binary option that pays 1:1 would be much larger than your risk of losing the money you bet on Red at the roulette table.