Traders, both novice and professional use different trading strategies in the forex market. From trend trading strategies, range trading, trading breakouts, trade reversals, trading support and resistance levels, and use of indicators. All these just show the numerous trading strategies out there in the market.
The focus of this article is to discuss a trading strategy known as the Martingale Strategy.
How the Martingale Strategy Works
The Martingale strategy involves doubling the trading size on a new trade whenever a trader makes a loss on the previous trade.
A basic example is shown in the table below:
The first investment was $100 which was a loss. Using the martingale strategy, you double the next investment to $200 which also ends up as a loss. As a result, you double the lost $200 and make a new investment of $400. You end up losing the $400. Then you double again and invest $800. This time, you make a gain.
You lose $100 on the first trade, $200 on the second trade, $400 on the third trade. Cumulatively, that is a loss of $700. But you made a gain of $800 on the fourth trade. The $800 gain covers the $700 cumulative loss and you end up with a profit of $100.
Martingale in Forex
In the forex market, traders set their stop loss and take profit levels. This helps them determine their profit targets and also determine the losses they are willing to incur.
If the price moves against a trader’s position and hits the stop loss set, the trader loses money. If the trader is using the martingale strategy, he/she will double the trading size. If the price moves in the direction as predicted and gains the number of pips lost in the first trade, the trader ends up recovering the lost money plus makes a gain. For example:
You buy 1 lot of EUR/USD at 1.1600 and set up a stop loss at 1.1580. When the price falls past the stop loss, you make a loss of $200. Pip value of EUR/USD is 10 (1 lot x 10 x 20pips). Hence the loss of $200. Then you enter a new trade and buy 2 lots of EUR/USD. If the price rises and you gain 20 pips, then you will be able to recover the $200 loss and also make a profit of $200 (2 lots x 10 x 20pips).
Advantages of Martingale Strategy
- If you have enough capital, there is a big chance of making profits. This is because although you may make losses when you continue doubling your trading sizes and end up making a profit, the profit made will cover the previous losses and you make some profit.
Disadvantages of Martingale Strategy
- It requires one to have a lot of capital.
- Risk of losing large amounts of capital when chasing small profits.
The martingale strategy has its benefits and disadvantages. It is up to the traders to decide what trading strategies will work for them in the market.