The Martingale Binary Options Strategy – Gambling or Trading?
This legendary system has been around for a very long time and it’s one of the most talked about strategies of all time. Today we are going to explain it in detail and see if it sucks or not. It originates in France and it was first used in the 18th century in the game of coin toss – a gambler wins if the coin comes up heads and loses if the coin comes up tails. To be honest, things are not looking good for the Martingale right now, because any association between a coin toss and trading…sucks big time. Let’s keep an open mind and continue: if the gambler wins, he plays again or leaves the gambling table to spend his easy money, but if he loses, he must double up on his bet in order for his potential win to cover for the previous loss. Here is an example: if the first flip of the coin is a loss of $1, on the second one, he bets $2. If the gambler wins this toss, he covered his loss of $1 on the first bet and on top of that, he made an extra dollar. All good so far, but if he loses the second toss as well, he must double up his previous bet, so now he has $4 at stake. If he wins, he gains $4 which will cover his previous losses and bring him an extra dollar (first loss – $1, second loss -$2, total – 3 dollars). If he loses, he will again double up the previous loss, which means he will bet $8. Ok, I’m not going to bore you anymore and just tell you that this doubling up will go on indefinitely until a win comes along. It will look like this: -$8, -$16, -$32, -$64….hmm, pretty long way from $1, which was our initial bet. Well, eventually the coin feels bad for all the losses and comes up heads for the win and given that our current bet was $128 (double the previous loss), we gain that amount and cover all the losses, plus $1 (all or losses summed up were -$127). That’s about it with the explanation so let’s look at the pros and cons of the strategy:
Why does the Martingale Strategy Suck?
Think of it this way: what if the streak of losses extends to 10, which is very possible? Assuming you just started with a bet of $1, your current bet would have to be $512…and if you win that, you make a measly profit of one buck (all your previous losses are -$511). Our bets will grow exponentially with every loss and the numbers will quickly get out of control and eventually we will run out of money. This strategy has no “edge”, nothing to make it work other than pure LUCK! It is clearly and with no doubt a gambling strategy…but maybe there is still hope for it and we could make it work in trading. Let’s see:
Why the Martingale Strategy Doesn’t Suck
It is mathematically proven that eventually the coin will come up heads and we will win if we can keep betting. The fact that you will win without a doubt generated the huge hype of the Martingale. However, you need two things to win for sure: infinite money and infinite time…yes, hard to find, but don’t forget we are traders, not gamblers. A trader tries to tilt the odds in his favor using technical and fundamental analysis. If we combine Martingale and good analysis of the market…we might have a winner. Now, I’m not talking about a complete novice that just uses Martingale and has no idea about market environment, but a trader that can get the direction right at least once in five trades, or depending on his account balance, even once every ten trades.
Conclusion – Use the Extreme Caution!
I am not really a follower of traditional trading and money management techniques and I consider that if used wisely – and please note that the bold characters are not used by mistake- it can turn out to be profitable, but not as a strategy by itself, because that is just gambling and hoping. If you are confident that your thoroughly tested system has an average losing streak of about three trades, then you might consider a Martingale system, knowing that eventually a winning trade will come. If all you do is gamble and think of yourself to be a trader, then the Martingale will blow in your face and you will be left with no money in your pocket. I don’t want to sound gloom, but the Martingale should have a tag that says “Handle with extreme caution”.