A Martingale forex strategy offers a risky way for traders to bet that that long-term statistics will revert to their means. Forex traders use Martingale cost-averaging strategies to average-down in losing trades. These strategies are risky and long-run benefits are non-existant.
Here’s why Martingale strategies are attractive to forex traders:
First, under ideal conditions and including positive carry, Martingale strategies offer what appears to be a predictable profit outcome and a “sure bet” on eventual wins.
Second, Martingale forex strategies don’t rely on any predictive ability. The gains from these strategies are based on mathematical probabilities over time, instead of relying on skillful forex traders using their own underlying knowledge and experience in particular markets. Novice traders like Martingale strategies because they can work even when the trader’s “trade-picking” skills are no better than pure chance.
Third, currency pairs tend to trade in ranges over fairly long periods of time, so the same price levels are often revisited many times. As with “grid trading,” there are usually multiple entry and exit possibilities in the trading range.
It’s important to understand from the beginning that a Martingale forex strategy doesn’t improve the chances of winning a given trade, and its major benefit is that it delays losses. The hope is that losing trades can be held until they become profitable again.
Martingale strategies are based on cost-averaging. The strategy means doubling the trade size after every loser until a single winning trade occurs. At that point, because of the mathematical power of doubling, the trader hopes to exit the position with a profit.
And by “doubling” the exposure on losing trades, the average entry price is lowered across all entry points.
A simple example of win-lose
The below table shows how a Martingale strategy works with a simple trading game, in which each round has a 50% chance of winning and a 50% chance of losing.
Stake Outcome Profit/Loss Current Balance
$100 Won $100 $100
$100 Won $100 $200
$100 Lost -$100 $100
$200 Lost -$200 -$100
$400 Lost -$400 -$500
$800 Won $800 $300
In this simple example, the forex trader takes a position size worth a standard $100 in account equity. With each winning trade in that same currency pair, the subsequent position size is kept at the same $100.
If the trade is a loser, the trade size is doubled for each successive loser. This is referred to as “doubling down.” If the forex trader is lucky, within a few trades he or she will enjoy a winner.
When the Martingale forex strategy wins, it wins enough to recover all previous losses including the original trade amount, plus additional gains.
In fact, a winning trade always results in a net profit. This occurs because:
2n = ∑ 2n-1 +1
Where n is the number of trades. So, the drawdown from any number of consecutive losses is recovered by the next successful trade, assuming the trader is capitalized well enough to continue doubling each trade until achieving a winner.
The main risk of Martingale strategies is the possibility that the trading account may run out of money through drawdown before a winning trade occurs.
A basic Martingale forex trading system
In real forex trading, there usually isn’t a rigid binary outcome – A trade can close with a variable amount of profit or loss. Still, the Martingale strategy remains the same. The trader simply defines a certain number of pips as the profit target, and a certain number of pips as the stop-loss threshold.
In the following recent EUR/USD example showing averaging-down in a falling market, with both profit target and stop loss levels set at 20 pips.
Rate Order Lots Entry Average Entry Absolute drop Break Even Balance
1.3500 Buy 1 1.3500 1.3500 0.0 0.00 $0
1.3480 Buy 2 1.3480 1.3490 -20.0 10.00 -$2
1.3460 Buy 4 1.3460 1.3475 -40.0 15.00 -$6
1.3440 Buy 8 1.3440 1.3458 -60.0 17.50 -$14
1.3420 Buy 16 1.3420 1.3439 -80.0 18.75 -$30
1.3439 Sell 16 1.3439 1.3439 -61.2 0.00 $0
First, the trader buys 1 lot at a price of 1.3500. The price then moves against the trader, down to 1.3480 which triggers the stop loss.
The trading system accounts 1.3480 as a “theoretical” stop loss, yet it doesn’t liquidate the position. Instead, the system opens a new trade for twice the size of the existing position.
So, the second line of the table above shows one more lot added to the position. This allows an average entry price of 1.3490 for the two lots.
It’s important to note that the unrealized loss is the same, yet now the trader needs a retracement of only 10 pips in order to break even, not the 20 pips envisioned by a loss following the first trade.
“Averaging down” by doubling the trade size reduces the relative amount needed to recover the unrealized losses. By averaging down with even more trades, the break-even value approaches a constant level which comes ever closer to the designated stop-loss level.
Continuing the above example, at the fifth trade the average entry price is 1.3439 so when the price moves upward through that point, the overall averaged holdings reach the break-even level.
In this example, the first four trades were losses, but all were covered by the profit on the fifth trade. A mechanical forex trading system can close out this group of trades at or above the break-even level. Or, the system can hold the currency pair for greater gains.
When a Martingale strategy works successfully, the trader can recover all losses with a single winner. Still, there is always a major risk that the trader may suffer an unrecoverable drawdown while awaiting a winner.
Caveats about the Martingale forex strategy
From a mathematical and theoretical viewpoint, a Martingale forex trading strategy should work, because no long-term sequence of trades will ever lose.
Still, in the real world the perfect Martingale strategy would require unlimited capitalization, since the trader may face a very long string of losses before achieving a single winner. Few traders could withstand the required drawdown.
If there are too many consecutive losing trades, the trade sequence must be closed at a loss before starting the cycle again. Only by keeping the initial position size very small in proportion to the account equity could the trader have any chance for survival.
Ironically, the higher the total drawdown limit, the lower the probability of losing in a trade sequence, yet the bigger that loss will be if or when it occurs. This phenomenon is called a “Taleb distribution.” The more trades, the more likely that a long string of losses will arise.
This issue occurs because during a sequence of losing trades with a Martingale system the risk exposure increases exponentially. In a sequence of n losing trades, the trader’s exposure increases as 2n-1.
So, if the trader is forced to exit a trade sequence prematurely, the losses are very large. On the other hand, the profit from a Martingale forex trade only increases in a linear way. It is proportional to half of the average profit per trade, multiplied by the number of trades.
Regardless of the underlying trading rules used to choose currency pairs and entry points, if the trader is only right 50% of the time (the same as random chance) then the total expected gains from winning trades would be:
Profit ≈ (½ n) x G
When n is the total number of trades and G is the amount of profit on each trade.
However, a single big losing trade will reset this amount to zero. Continuing the example above, if the trader sets a limit of 10 double-down trades, the biggest trade lot size would be 1024. The maximum amount would only be lost if there were 11 losing trades in a row.
According to the above equation, the probability of this occurrence is (½)11. In other words, the trader would expect to lose the maximum amount once every 2048 trades.
After 2048 forex trades:
• Expected gains are (½) x 211 x 1 = 1024
• Expected worst single loss is -1024
• Expected net profit is 0
Assuming the trader’s trade-choosing strategy is no better than simple chance, the Martingale system always offers at least a 50-50 chance of success.
Again, Martingale doesn’t improve the chances of winning a trade, it simply postpones losses or helps the trader potentially avoid losses by staying in the positions long enough. It is risky, and very few traders have been successful with Martingale strategies in the long run.
Martingale forex strategies only work when currency prices are trading in a range
Some trend-following traders use a “reverse Martingale” strategy that involves doubling winning trades, and cutting losses quickly. However, Martingale strategies tend to suffer during trending markets. The only opportunities come from range-trading instead of trend-following.
The challenge is to choose currency pairs with positive carry which are range-bound instead of trending. And, the trading system should be programmed to unwind positions when steep corrections occur.
Martingale forex strategy can enhance yield
One occasional use of Martingale forex strategies is to enhance yield. Some traders use Martingale strategies with positive-carry forex trades of currency pairs with large interest-rate differentials. That way, positive credits accumulate during the open trades.
By limiting drawdown to 5% of the account equity, some traders achieve 0.5 to 0.7% monthly return by using Martingale strategies when EUR/CHF and EUR/GBP are trading in tight ranges over fairly long periods of time.
The trader must keep a watchful eye for the risks that can result when forex prices break out into new trends, especially around support and resistance levels. Again, Martingale only works with range-bound currency pairs, not trending ones.
How to calculate the drawdown limit for a Martingale forex strategy
For traders willing to risk a Martingale forex strategy, the first thing to decide is the position size and risk. To keep this example simple, let’s use powers of 2.
The number of lots traded will determine the number of double-down trade legs that can be placed. For example, if the maximum is 256 lots, this allows 8 double-down legs.
Maximum lots that can be traded = 2number of legs
If the final trade in a sequence is closed when its stop-loss point is reached, then the maximum drawdown will be:
Drawdown < Maximum number of lots x (2 x stop-loss) x lot size
So, with 256 micro lots, and a stop-loss set at 40 pips, the maximum drawdown would be $2048.
To determine the average number of trades that the system can sustain before a loss, use the calculation:
2number of legs + 1
In the current example, that number is 29, or a total of 512 trades. After those 512, the trader would expect to suffer 9 consecutive losing trades.
With a Martingale forex strategy the only survivable way to manage drawdowns is to use a “ratchet” system: As profits are earned, the size of the trading lots and drawdown limits are both increased incrementally.
Trade sequence Equity realized Drawdown allowed Profit
1 $1,000 $1,000 $25
2 $1,025 $1,025 $5
3 $1,030 $1,030 -$10
4 $1,020 $1,020 $5
5 $1,025 $1,025 $20
This ratcheting adjustment should be handled automatically by the mechanical trading system, once the trader sets the drawdown limit as a percentage of the equity realized.
Entry
For entry signals in a Martingale forex strategy, traders sometimes “fade” or trade the false break-outs from the range. For example, when the currency pair’s price moves a certain number of pips above the 15-day moving average (MA), the system places a sell order.
When using this method, it’s important to act only on signals that indicate a high probability that the price will retrace back into the original range instead of breaking out.
Profit targets and stop-losses
It’s also important to set the profit targets and stop-loss points appropriately. On the one hand, if the values used are too small the system will open too many trades. On the other hand, if the values are too large then the system may not be able to sustain enough successive losses to survive.
With Martingale strategies, only the last stop-loss point is actually traded. All the previous stop-loss levels are “theoretical” points since the trades aren’t actually liquidated there, and in fact a new trade with double position size is added at each of those points.
Martingale trades must be consistently treated as a set, not individually. Forex trades using a Martingale strategy should only be closed out when the overall sequence of trades is profitable, that is, when there is a net profit on the open trades.
The Martingale trader hopes that a winning trade will be achieved before the drawdown from successive doubled losses drains the trading account.
The choice of profit targets and stop-loss points also depends on the trading time frame and the market’s volatility. In general, lower volatility means the system can use a small stop-loss value.
Some traders set a profit target of somewhere between 10 to 50 pips and a stop-loss value between 20 to 70 pips. There are several reasons for this.
A small profit target has a greater probability of being achieved sooner, so the trade can be closed while profitable. And, since the profits are compounded due to the exponential increase in position size, a small profit-target value may still be effective.
Using a small profit target doesn’t change the risk-reward ratio. Even though gains are small, the nearer threshold for gaining improves the overall ratio of winning to losing trades.
The benefits and disadvantages of a Martingale forex strategy
A Martingale forex trading strategy offers very limited benefits, such as trading rules that are easy to define and program into an Expert Advisor or other mechanical trading system. And, the outcomes regarding profits and drawdowns appear statistically predictable. As well, Martingale strategies don’t rely on a trader’s ability to predict market direction or choose winning trades.
However, Martingale forex strategies are invariably losers in the long run. They simply postpone or avoid losses instead of creating standalone profits.
And, unless the losses are managed carefully by adjusting the position sizes and drawdown limits when profits are earned, a Martingale strategy may run out of money during a particularly harsh drawdown. This can happen because exposure to risk increases exponentially, yet the profits only increase in a linearly.
In summary, Martingale forex strategies may be helpful when used during limited periods in trading ranges by experienced traders who focus on positive-carry currency pairs. Yet, the risks are overwhelmingly negative.
Have you ever tried a Martingale “double down” strategy in your own forex trading?
King Klippel says
Very interesting article> I use this strategy often, although I didn’t know it had a name. I ‘ALWAYS’ use a larger time frame, like the daily and/or weekly for my overall bias. As stated in the article (my experience confirms) you really don’t want to get caught in a longer term trend against you. Best used is in a ranging market, this technique can be profitable in a smaller trending market and on retraces. Make a 1 hr blank chart and install a 50 period ma. 60% – 80% of trading time is consolidation (order gathering). Once the dealers have an imbalance on their books, they’ll move against the majority money. Price always returns to the ma showing that selling into a rising market or buying into falling price can be a profitable strategy. A more common application is setting pending orders on the std Fib levels.
Now, here’s the real reason this strategy works. When price is rising, market makers & dealers (the liquidity providers on the other side of our trades) are selling to buyers. They are selling into a long price move, right? Once momentum begins to fail, traders start taking profits, sellers begin to enter and the market reverses… sometimes dramatically… taking any gains from the original longs. Panic sets in and trades are closed. Greed attracts more sellers sensing opportunity. Savvy traders close their longs for profit and immediately open short positions (some trading platforms, c-Trader for example, will perform this function with one click). Now, the market makers have the upper hand… they are holding positions at the top of the move and dollar cost average as the price moves down.. often with a speed that is double of the upward cautious buying. (check your charts… selling is usually panic driven) Ever wonder why the Euro loves to retrace to the 77% Fib? The market makers are profiting all the way, hurting trapped long traders & pushed by sellers jumping on the bank wagon (who will get trapped short once the price reverses). Remember, there is a market maker on the ‘other side of your computer screen’ taking the other side of your trade and has NO intention of loosing money.
So, trade with the big boys… sell into a rising market and buy into a falling move. Open a demo and try it. With the 50 ma as your center line, you’ll be surprised how often one or 2 days of negative positions will suddenly, within a trading session, put you positive.
KERRY says
HEY WHAT ARE SOME GOOD MARTINGALE EA INPUT SETTINGS SUCH AS SL/TP=SAME TARGET= TRALINGSTOP= ECT PLEASE HELP ME IM GOING CRAZY TRYING TO GET A GOOD PARAMETER INPUT FOR MY EA THANKYOU
Shaun Overton says
There are no inputs that will make a Martingale work in the long run. It’s doomed to catastrophic failure.
Cheero says
I’m not into geeky math formulas, basic math comprehension is all you need.
After several years of testing “Breakout Reversal Systems” (including Martingale style), my conclusions are, “if” you time your initial entry corrently & stop the perpetual in/out cycle, trail stop management, and allow Exits Only when the pair is projected to slow down. (use Start Stop times)
Also, if you double down on reversals you’ll only recoup your initial investment, you need to multiply greater than x2 and add Spread & Slippage to your TP or to your lot size. (open an xls file & Start a doubling count with $2 and see what your bet size will be after 10 losses, and that’s just to recoup your initial 2$. Multiplying by 2.75 or 3 makes more sense but requires deeper pockets, but the more often you lose to bigger the reward gets.
Lastly, If you want to trade a more sucessful martingale system (less reversals), you’ll need use better filters to time your entries, then, make sure the bet size is small to start off with and that you’ll have deep enough pockets to survive the worst case scenario, (real life Casino odds in Montreal for red/black, odds/even, were 13 losers in a row) that’s why they limit doubling to 4x, to make sure they stack the odds in their favour.)
If you don’t have good entry timing with “no trading” filters, then stay away from martingale systems.
Cheero
Shaun Overton says
It’s always nice hearing other perspectives. I don’t think people should ever Martingale, but I appreciate the through that you’ve put into this.
Jose says
Thank you Shaun for the service and thank you Eddie for the article about martingale Forex Strategy. Also, thank you King for the comment. I was wondering if you do it manually or if that technique/strategy can be converted into an EA?
Humphrey says
The Chinese love martingale. They collect funds from each other and open $1million + dollar markets and martingale the crap out of FX
they make 5 times more before they go burst..
Marti needs deep pockets
Shaun Overton says
Martingale would be awesome with unlimited funds. Then again, having unlimited funds would be more awesome.
James Musser says
And who has unlimited funds? Indeed, they do…
James Musser says
The truth is, it all comes down to how good your research is to begin with. If you are just throwing $ at the market, you are going to lose, unless you are just lucky (which is even worse, if you win)!
If your research is stellar, then Martys are very helpful. If you don’t know what you are doing, then you are going to have a rude awakening.
p.s. – good luck catching the top and/or the bottom without using Martys!
The fact is, it all comes down to two things – how deep your pockets are, and how well you did your homework.
Biscuit Sam says
If you have a system that can distinguish between trending and sideways markets (and does not lag too badly), you can vary your martingale in the following fashion to adapt to accomodate each market type:
– When you’ve determined the market is sideways (this is not so easy to do of course), you keep your trade direction (buys or sells) constant. Meaning if you’ve determined you are in a sideways market and you have buy orders open, you keep placing your larger buy orders until the sideways market eventually cycles back up and you close your trades with a net gain.
– When you determine you are in a trending market, then you starting alternating the direction of your subsequent trades. This way either your new trade or the next trade will agree with the current trend and you will close that trade out and the others with a net profit.
Shaun Overton says
Agreed in principle. Where I disagree is that this is much easier said than done.