Systems are probably the oldest of the betting systems. They were
originally developed for play on the even chance bets on a roulette
table but can be used on any even chance bets of other games. Although
developed for gambling, Martingale money management methods can easily
be used for trading.
Although there are
many variations of the Martingale system, in its simplest form, you
double the bet after each losing bet until a winning trade occurs.
That final winning bet after a string of loses will replace all the
previous lost money plus give you a profit equal to your original bet.
It does not matter how many losing bets occurred as long as you double
each bet after a loss eventually you must win.
For example, you
are at Las Vegas playing roulette and you have four losses in a row
and then a win. You start out betting $5 and you lose. You double the
bet to $10 and you lose. The next bet is $20 and then $40. You have
lost a total of $75. You double the wager from $40 to $80. You have
$155 at risk, however you get lucky and you win. You win $80 less the
$75 you lost and have a profit of $5.
Lost - $75
Won - $80
At risk, before the win - $155
Profit - $5
If you have an
infinite amount of money, eventually you will win. Letís say your
losing streak was 8 before you won. That means that your final bet
before the win was $2,555. You had $3,835 at risk to win $5. This is
only about a 0.13% return on your money. I donít know about you, this
seems like a bad bet.
What is important
is that the bet size quickly increases during a string of losses. For
those of us without a Bill Gates size bank roll, you can be bankrupt
before being rescued by a winning bet. Even if you do have a huge bank
roll, casinos have a limit on the size of bets in order to prevent
heavily capitalized gamblers from using this strategy.
The problem with
the Martingale systems is that after a run of losses, the bet size
begins to get enormous. This system will work with certainty if the
trader has a large amount of capital and time. No matter how great the
string of losses, there will eventually be a winning trade which will
recoup the losses. This system can only be recommended by those with
unlimited wealth and time. For the rest of us, Martingale systems are
a way to financial disaster.