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. Third, currency pairs tend to trade in ranges over fairly long periods of time, so the same price levels are often revisited many times.

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. If the trade is a loser, the trade size is doubled for each successive loser. 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. 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.

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. First, the trader buys 1 lot at a price of 1. The price then moves against the trader, down to 1. The trading system accounts 1. 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. 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.

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.

Martingale Trading Strategy - How To Use It Without Going Broke

Still, there is always a major risk that the trader may suffer an unrecoverable drawdown while awaiting a winner. 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 issue occurs because during a sequence of losing trades with a Martingale system the risk exposure increases exponentially. 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. 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 The maximum amount would only be lost if there were 11 losing trades in a row. In other words, the trader would expect to lose the maximum amount once every trades. It is risky, and very few traders have been successful with Martingale strategies in the long run.

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. 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. 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.

The Doubling Down Forex Trading Strategy

For traders willing to risk a Martingale forex strategy, the first thing to decide is the position size and risk. The number of lots traded will determine the number of double-down trade legs that can be placed.

For example, if the maximum is lots, this allows 8 double-down legs. If the final trade in a sequence is closed when its stop-loss point is reached, then the maximum drawdown will be:. To determine the average number of trades that the system can sustain before a loss, use the calculation:.

In the current example, that number is 29, or a total of trades. After those , the trader would expect to suffer 9 consecutive losing trades. As profits are earned, the size of the trading lots and drawdown limits are both increased incrementally. 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.

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. 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.

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.

Even though gains are small, the nearer threshold for gaining improves the overall ratio of winning to losing trades. 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. However, Martingale forex strategies are usually losers in the long run, since 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 linear way. 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 worrisome. Let us know your thoughts in the comments below. The Risks Of A Martingale Forex Strategy. Never miss the opportunity to learn powerful new insights. Join the thousands of other Forex Alchemy subscribers and we will keep you informed with cutting edge articles, tips, tools and analysis from across the trading industry to power you forward on your trading journey.

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Forex traders use Martingale cost-averaging strategies to average-down in losing trades. These strategies are risky and long-run benefits are difficult to achieve. About the Author Eddie Flower has more than thirty years of trading experience and market insight regarding stocks and derivatives in U. Now semi-retired from a career in financial services, he remains active as an independent trader, financial analyst and writer for onestepremoved.

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