What Is the Martingale System?
The martingale system is a system of investing in which the dollar value of investments continually doubles after losses, or the position size increases with the lowering portfolio size.
The martingale system was used by bettors in 18th century France and introduced to probability theory by French mathematician Paul Pierre Levy in the 20th century. The strategy is based on the premise that only one good bet or trade is needed to turn your fortunes around.
This technique can be contrasted with the anti-martingale system, which involves halving a bet each time there is a trade loss and doubling it each time there is a gain.
Key Takeaways
- The martingale system is a methodology to amplify the chance of recovering from losing streaks.
- The martingale strategy involves doubling up on losing bets and reducing winning bets by half.
- It is essentially a strategy that promotes a loss-averse mentality that tries to improve the odds of breaking even, but also increases the chances of severe and quick losses.
- Forex trading is more well-suited to this type of strategy than for stock trading or casino gambling.
Understanding the Martingale System
The martingale system (also known as the martingale strategy) is a risk-seeking method of investing. The main idea behind the martingale system is that statistically, you cannot lose all of the time, and thus, you should increase the amount allocated in investments—even if they are declining in value—in anticipation of a future increase.
Martingale strategies rely on the theory ofmean reversion. Without a plentiful supply of money to obtain positive results, you need to endure missed trades that can bankrupt an entire account. It’s also important to note that the amount risked on the trade is far higher than the potential gain. Despite these drawbacks, there are ways to improve the martingale strategy that can boost your chances of succeeding.
The martingale system is commonly compared to betting in a casino with the hopes of breaking even. When a gambler who uses this method experiences a loss, they immediately double the size of the next bet. By repeatedly doubling the bet when they lose, the gambler, in theory, will eventually even out with a win.
This assumes that the gambler has an unlimited supply of money to bet or at least enough to make it to the winning payoff. If that isn’t the case, just a few successive losses under this system could lead to losing everything you came with.
Basic Example of the Martingale System
To understand the strategy, let's look at a basic example. Suppose you have a coin and engage in a betting game with one friend of either heads or tails with a starting wager of $1. There is an equal probability that the coin will land on heads or tails, and each flip is independent (the prior flip does not impact the outcome of the next flip).
As long as you stick with the same call of either heads or tails, you would eventually, see the coin land on heads (or tails, if that's your call) and thus recoup all of your losses in addition to the bet. Here's the idea behind it:
- Bet $1 on heads, the result is tails, total losses of $1
- Bet $2 on heads, the result is tails, total losses of $3
- Bet $4 on heads, the result is heads, win $4
- Bet $4 on heads, the result is tails, total losses $4
- Bet $8 on heads, the result is heads, win $8
You get your $8 back plus $8, netting a total of $8 in winnings.
Drawbacks of the Martingale System
The martingale system does not guarantee success for a variety of reasons. For example, most exchanges place a limit on trade size. At some point, you will not be able to keep doubling the size of your investment because you will reach that limit. If you haven’t made back your money by then, you won’t be able to.
There are other drawbacks as well:
- The amount you spend trading increases rapidly with each successive trade.
- Each trade comes with transaction costs, which increase the money you spend.
- The stock may stop trading, or the company may go out of business.
- The risk is much higher than the reward since you spend higher amounts with each loss, but the profit will only be equal to the size of your investment.
- You can lose everything if you keep using this strategy.
Using a martingale strategy depends on mean reversion. Markets often revert to their mean, but the timeline in which that happens is not reliable. Outside factors, such as changes in the broader economy or the underlying asset, can impact the market and the value of your investment.
Like any investment strategy, the martingale system comes with risks and is not appropriate for every investor.
The Martingale System in Forex Markets
Martingale trading is a popular strategy in the forex (FX) markets. There are several reasons why using martingale is a safer strategy in the currency market than investing in other assets or gambling.
Currencies, unlikestocks, rarely drop to zero. Although companies can easily go bankrupt, most countries only do so by choice. There will be times when a currency falls in value. However, even in cases of a sharpdecline, the currency’s value rarely reaches zero.
TheFXmarket also allows traders to earn interest. This means forex investors following the martingale strategy can offset a portion of their losses withinterestincome.
For example, a martingale trader can use the strategy on currency pairs in the direction ofpositive carry. They would borrow using a low-interest-rate currency and buy a currency with a higher interest rate.
Does the Martingale System Work?
If you have the funds available to continue using the martingale system until it works, it does allow you to make a profit. However, the risk to reward is not equal. You may have to invest, trade, or gamble large sums as you double your investment with each loss. Your eventual profit will be much lower.
What Is the 100% Profitable Martingale Strategy?
The strategy involves doubling losing bets until profitability. To be 100% profitable, this strategy can require large amounts of money, so tremendous risk is involved.
What Is the Problem With the Martingale Strategy?
The martingale system depends on chance—the chance that at just the right moment, you'll hit the right combination of outcome and investment and make everything back plus more. The issue is that there is no way to predict when that will happen, before or after you run out of money.
The Bottom Line
The martingale system is a methodology to amplify the chance of recovering from losing streaks that can be used in investing or gambling. It involves doubling up on losing bets and reducing winning bets by half. The strategy assumes that a single investment, or bet, cannot lose every time, so if you continue increasing the same investment, eventually you will earn back your money plus a profit.
The martingale system promotes a loss-averse mentality that tries to improve the odds of breaking even. However, it increases the chances of severe losses if the odds of the different outcomes happening are not equal or if you don’t have the funds to continue making investments until you turn a profit. Using the martingale strategy is more suited to forex trading than trading stocks or gambling in a casino.
