There are numerous investment strategies in financial markets, each with its own risks and benefits, tailored to the individual needs of investors. On our itez blog, we have already discussed various strategies in trading, and today we want to introduce another one.
In this new comprehensive guide, you will learn what the Martingale strategy is in trading, its core principles, and the features of this strategy, as well as whether the risks are worth the game. If you’re ready, let’s begin!
Key Principles of the Martingale Strategy
History of the Strategy's Origin
The Martingale strategy is a betting management method where the player doubles their bet after each loss in order to cover previous losses and make a profit with the first win. It was initially designed for a game where the player wins if the coin lands heads up and loses if it lands tails. While it was originally applied to gambling games such as roulette, the strategy was later adapted to other areas, including trading and investing in digital assets markets. In short, this strategy is entirely based on probability theory.
The origins of the strategy go back to the mid-18th century. It was during this time that the strategy received its modern name. It is also referred to as "D'Alembert's Martingale," but there is no evidence to suggest that the French encyclopedist D'Alembert has any connection to it. Some versions claim the strategy is named after a lucky 19th-century card player.
How Does the Betting Doubling Strategy Work?
The concept behind the strategy is extremely simple. The player (or in our case, the investor or trader) starts with a minimal stake or deposit. Each time a trade ends unfavourably, the investor doubles their stake. This process continues until the investor makes a profit. The goal is to earn enough to cover all previous losses and then make a small profit.
How Does Martingale Strategy Work? Source: Capital.com
It is important to note that Martingale is not a guaranteed profit strategy. An investor applying this tactic will rarely end up losing a trade, but when they do, the loss can be significant. At the same time, they will win small amounts, although frequently. So, it’s more accurate to talk about the redistribution of profits rather than consistent gains.
Examples of Using the Martingale Strategy
As we have already discussed, the Martingale strategy was originally designed for gambling. However, its application has expanded significantly over time and extends far beyond casinos and betting.
Let’s track the evolution of the strategy with specific examples to better understand the risks and benefits it entails.
Application in Casinos and Gambling
In casinos, the Martingale betting system is often used in games with even odds, such as roulette (bets on red/black or odd/even). For example, if a player bets on red and loses, they double their bet on the same outcome. If they lose again, the bet is doubled once more. The idea is that once they win, they recover all previous losses and gain a profit equal to the original stake.
However, due to betting limits and the presence of zero (or double zero), the strategy doesn’t guarantee success. Moreover, a prolonged losing streak can lead to very large bets, which may become unaffordable for the player's bankroll. Thus, while the Martingale strategy may work in the short term, it is high-risk in the long run.
Application in Financial Markets (Forex)
On financial markets, the Martingale strategy is applied in trading, where traders increase their position size after a losing trade, hoping for a market reversal. Traders use this strategy to compensate for losses from previous trades by doubling their positions. For instance, if a trader buys a currency pair and the trade goes against them, they might double their position on the same trade to recover their losses. This method theoretically works if the market eventually moves in the trader’s favour.
However, just like in gambling, risks in financial markets are substantial. Markets can remain unstable for prolonged periods, and using the Martingale strategy can lead to significant losses if the market doesn’t move as anticipated.
Application in Crypto Markets
Finally, let’s consider an example of the Martingale system relevant to the cryptocurrency market. Suppose an investor decides to invest $100 in Bitcoin. They buy part of the coin for the selected amount, but on that day the price drops. As a result, the investor decides to double their "bet" — instead of $100, they invest an additional $200. Thus, their total investment becomes $300.
If the price of Bitcoin continues to fall, the investor decides to double the bet again, purchasing more coins for $400, bringing their total investment to $700. This doubling process continues until the investor makes a profit, and the price of Bitcoin returns to a level where they can sell the coins with a profit that covers all previous losses and provides a small gain.
While this approach can work when the market eventually recovers, it is important to note that cryptocurrency markets are highly volatile. If the price continues to decline over an extended period, the investor could face substantial losses.
Advantages and Disadvantages of the Martingale Strategy
So, in the end, is the doubling strategy worth all the risks associated with it? To answer this question, let's first analyse the key pros and cons of the Martingale system.
Potential Benefits of Using the Strategy
➕ Simplicity in understanding and applying
This strategy doesn’t require deep knowledge of trading and only involves doubling the bet. Even a beginner can easily grasp this approach.
➕ Stability and relative predictability of results
The idea here is that the course of action is predetermined, both in the case of success and failure. This means the trader doesn’t need to make any strategy adjustments on the spot, depending on changing market conditions.
➕ The ability to recover all previous losses with a single successful trade
The mathematical calculation behind the strategy suggests that a single profitable trade will inevitably cover losses from all previous trades and yield a small profit.
➕ Effective in the short term, provided there is sufficient capital
If the trader can afford to "go all the way", they will eventually make a profit. However, this requires that the series of losses isn't too long and doesn't "eat up" the investor’s capital.
➕ It offers the potential for "guaranteed profit", provided the trader continues to invest until a win
Theoretically, the strategy guarantees that the player or trader will always win in the end, provided they have unlimited funds and no betting limits.
Main Risks and Limitations
➖ The need for a large bankroll to survive long losing streaks
The strategy assumes that players or traders have enough funds to keep doubling their bets, which is not always realistic. A prolonged losing streak can quickly increase the size of the bets, making it impossible to continue increasing them.
➖ Betting limits in casinos or margin requirements in financial markets
For example, a casino might set a betting limit of $500, which means that after several losses, the Martingale strategy becomes unfeasible. In trading, high leverage can amplify risks, as losses can quickly exceed the initial investment.
➖ High risk of losing all capital during an extended losing streak
If the market continues to move against the trader for too long, a series of unsuccessful trades could easily "eat up" their capital. The assumption that every trader has unlimited capital to invest is simply unrealistic. Therefore, despite the relatively stable and predictable nature of the Martingale system, the risk of depleting one’s capital still exists.
Alternatives to the Martingale Strategy
Anti-Martingale Strategy
The Martingale strategy has its "twin sister" — the Anti-Martingale strategy. It flips the trading psychology described earlier on its head and changes the usual rules of the game. Instead of increasing the bet after each loss, the investor or trader increases their bet after a win and decreases it after a loss.
Let’s look at this strategy with an example:
Suppose the investor starts with $100 and makes the first trade, which brings in a profit. Instead of returning all the money to the next step, they double their bet — for example, investing $200, because the win increases their confidence in the success of the next trade. If this trade results in a loss, the bet is reduced back to the original amount — $100.
This approach helps to minimise risks, as the bet size decreases after a loss, preventing significant losses. In the case of wins, on the other hand, it’s possible to achieve a significant increase in capital, but without the catastrophic consequences of a loss.
Other Risk Management Strategies
In addition to the one described above, there are several other ways of risk management with Martingale that help investors and traders protect themselves.
1. Fixed-Size Bet Strategy
The essence of this strategy is that the trader or investor places a fixed amount on each trade, regardless of previous losses or wins. This helps avoid large losses in unsuccessful trades but also limits potential profits.
2. Diversification Strategy
One of the most popular risk management methods is diversification — spreading capital across different assets or markets to minimise the impact of negative fluctuations in any one of them. For example, if an investor is involved in cryptocurrencies, stocks, bonds, and other assets, a loss in one market won’t have a catastrophic impact on the entire portfolio.
3. Hedging Strategy
Hedging is a method where an investor or trader uses instruments such as options or futures to protect their capital from potential losses. For instance, if a trader buys Bitcoin, they can sell a put option for Bitcoin at a fixed price to protect themselves against a decrease in its value. This method requires knowledge and experience but is a powerful tool for capital protection.
Conclusion
One of the most well-known and easiest strategies to understand and use is certainly the Martingale strategy. This system is simple and straightforward — it involves doubling the deposit after each unsuccessful trade. The process should continue until the trader earns enough profit to cover all previous losses and make a small gain.
However, this strategy comes with its own risks and limitations, which can make it potentially unprofitable or risky. The itez team always advises you to trade only with money you can afford to lose, and to carefully weigh all the risks.
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This article is not investment advice or a recommendation to purchase any specific product or service. The financial transactions mentioned in the article are not a guide to action. It’s not intended to constitute a comprehensive statement of all possible risks. You should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
