The Underrated Power of Martingale
Martingale is just like any other money management strategy. It can be devastating in the wrong hands or it can turn a profit for those who respect the principle and devise workarounds for it's downfalls. Let me explain to you how I see the proper implementation of martingale in a trading strategy system and why 99% of people look at it completely wrong and subsequently rule out the effectiveness of martingale.
Account Balance: $1,000
Risk/Reward on each Trade: 1:2.5
Stop-Loss on Last trade: 40 pips
Take Profit: 100 pips
Micro Lot / Standard Lot Size Equivalent
1. .01 - 0.0001
2. .02 - 0.0002
3. .04 - 0.0004
4. .08 - 0.0008
5. .16 - 0.0016
6. .32 - 0.0032
7. .64 - 0.0064
8. 1.28 - 0.012 of standard lot
9. 2.56 - 0.025
10. 5.12 - 0.05
11. 10.24 - 0.10
12. 20.48 - 0.20
13. 40.96 - 0.4096
14. 81.92 - 0.819
15. 163.84 - 1.6384
Most martingale strategies fail after 4-7 consecutive losses. But what if we had a forex system that failed after 15 consecutive losses (which is very unlikely if our strategy is over the 50% win rate threshold and our Risk/Reward is at least 1:2)? This is possible by utilizing a micro lot account where you trade with a fraction of a standard lot. So every 1 win equates to making $0.10 profit using a $1,000 account balance and using 100 pip as the Take Profit. In order to make any meaningful gains (let’s say $50 profit every day) we’d need $500,000. But we would want to divide that up into 500 separate $1,000 micro-lot accounts and apply our automated strategy to virtually most currency pairs. This allows us to REDUCE our risk as well, in case single account is starting to incur 4, 5, 6, 7, consecutive losses, we're not at risk of losing the entire account balance, rather just a small portion of it ($1,000). So if 15 consecutive losses is a RARE occurrence but it IS expected to happen at some point, then when it does happen we're only losing $1,000 instead of our combined investment value, thus surviving martingale and making consistent money using micro lot accounts and a large account(s) balance. And on our last trade we'd be making a 163 micro lot trade (1.6 standard lots) and if we lose that trade, then 99% of the account will have drained. Now remember, this is 99% of the ORIGINAL starting balance. If we let the system run for 6 months and it accumulates profits, those will still be safe.
So you see, it’s possible to make martingale work, but you need at least $500,000 just to be on the bottom of the barrel. Now let’s say you have over $5 million then you can scale upwards and begin to make $500 every day from a combination of many micro-lot accounts, using an automated strategy + martingale. A hands off approach and after 1 year, you’d amass $120,000 from all of these accounts combined. That’s a 2.4% gain on your money, not bad for a strategy that is 100% hands-off after you get it going.
The implications of creating a working martingale system using the above approach is huge! If these numbers work out, then people can make a lot of money. Someone may not have $5 million or even $500k to make this work but it's not hard to acquire that using the PAM method. Think about it, if someone was to create a working martingale with math that makes sense and works, how hard would it be to create a PAM account and get 1,000 people to pool together $5,000 each (some more, others less) for one trader to be able to trade with over $5 million. Basically a near guaranteed 2.4% yearly. Market this automated system to the wealthy who gravitate towards 2-5% gains and you may be able to grow your PAM by adding on tens of millions of dollars from single individuals.
The biggest issue people see with martingale is how quickly bets start becoming just to recoup previous losses. But I feel as if Forex was designed for martingale. With the way margin and currency is traded, you can go down to the minuscule scale and leverage margin in order to scale up. In this way, we can minimize our risk. And consider the fact that we will WIN at some point, these two factors makes for a GREAT underlying money management strategy as long as we work out the kinks and workaround the downfalls.
Key Points
1. Micro Lots: We use micro lots to increase the length of consecutive losses we can sustain
2. Split Balance: We divvy up our capital into different accounts to not leave anything to chance or luck. Getting 15 consecutive losses is RARE but EXPECTED. So when it does happen, we will only lose $1,000 rather than sacrificing our entire account balance. If our combined account is $5 million, losing $1,000 is only losing 0.0002% of the account balance, VERY small risk!!! This is the POWER of this martingale system.
3. Risk/Reward: As with any trading strategy, we need good fundamentals. Our underlying automated strategy must be over 50% winning AND have a Risk/Reward of 1:2. Profit must be in the 50-100 pip range with daily trades being taken. We can trade this on any currency pairs and timeframes to increase trading opportunities and reduce risk.
4. Automated Trading: Using the above stats, we need to make this into a EA (since it's impossible to manage hundreds of MT4's at the same time). We need a automated strategy that works well with my stipulations for Risk/Reward and win rate, there are few out there, not many. Hell, there's a 50/50 chance during a coin flip. You can even buy/sell based on yesterdays high/low during the Asia session and probably have the same 50/50 odds of winning if you use a static TP/SL (100:40). Maybe we can use this type of strategy for backtesting purposes or even for forward tests. I'll have to write some C++ code to turn this into a full fledged EA that can be deployed on thousands of MT4's; it'll take time but not impossible.
5. PAM Account: Use PAM strategy for acquiring the capital to fund this type of martingale strategy. This is the last stage of development in order to see real money. Remember that money begets more money and the best strategies can only work if massive capital is involved. So in this way, we must think bigger and not smaller in order see consistent gains that incurs less risk with the more money we accumulate (this is the secret to long-term wealth generation).
Who's up to the massive challenge of proving me wrong?
Martingale is just like any other money management strategy. It can be devastating in the wrong hands or it can turn a profit for those who respect the principle and devise workarounds for it's downfalls. Let me explain to you how I see the proper implementation of martingale in a trading strategy system and why 99% of people look at it completely wrong and subsequently rule out the effectiveness of martingale.
Account Balance: $1,000
Risk/Reward on each Trade: 1:2.5
Stop-Loss on Last trade: 40 pips
Take Profit: 100 pips
Micro Lot / Standard Lot Size Equivalent
1. .01 - 0.0001
2. .02 - 0.0002
3. .04 - 0.0004
4. .08 - 0.0008
5. .16 - 0.0016
6. .32 - 0.0032
7. .64 - 0.0064
8. 1.28 - 0.012 of standard lot
9. 2.56 - 0.025
10. 5.12 - 0.05
11. 10.24 - 0.10
12. 20.48 - 0.20
13. 40.96 - 0.4096
14. 81.92 - 0.819
15. 163.84 - 1.6384
Most martingale strategies fail after 4-7 consecutive losses. But what if we had a forex system that failed after 15 consecutive losses (which is very unlikely if our strategy is over the 50% win rate threshold and our Risk/Reward is at least 1:2)? This is possible by utilizing a micro lot account where you trade with a fraction of a standard lot. So every 1 win equates to making $0.10 profit using a $1,000 account balance and using 100 pip as the Take Profit. In order to make any meaningful gains (let’s say $50 profit every day) we’d need $500,000. But we would want to divide that up into 500 separate $1,000 micro-lot accounts and apply our automated strategy to virtually most currency pairs. This allows us to REDUCE our risk as well, in case single account is starting to incur 4, 5, 6, 7, consecutive losses, we're not at risk of losing the entire account balance, rather just a small portion of it ($1,000). So if 15 consecutive losses is a RARE occurrence but it IS expected to happen at some point, then when it does happen we're only losing $1,000 instead of our combined investment value, thus surviving martingale and making consistent money using micro lot accounts and a large account(s) balance. And on our last trade we'd be making a 163 micro lot trade (1.6 standard lots) and if we lose that trade, then 99% of the account will have drained. Now remember, this is 99% of the ORIGINAL starting balance. If we let the system run for 6 months and it accumulates profits, those will still be safe.
So you see, it’s possible to make martingale work, but you need at least $500,000 just to be on the bottom of the barrel. Now let’s say you have over $5 million then you can scale upwards and begin to make $500 every day from a combination of many micro-lot accounts, using an automated strategy + martingale. A hands off approach and after 1 year, you’d amass $120,000 from all of these accounts combined. That’s a 2.4% gain on your money, not bad for a strategy that is 100% hands-off after you get it going.
The implications of creating a working martingale system using the above approach is huge! If these numbers work out, then people can make a lot of money. Someone may not have $5 million or even $500k to make this work but it's not hard to acquire that using the PAM method. Think about it, if someone was to create a working martingale with math that makes sense and works, how hard would it be to create a PAM account and get 1,000 people to pool together $5,000 each (some more, others less) for one trader to be able to trade with over $5 million. Basically a near guaranteed 2.4% yearly. Market this automated system to the wealthy who gravitate towards 2-5% gains and you may be able to grow your PAM by adding on tens of millions of dollars from single individuals.
The biggest issue people see with martingale is how quickly bets start becoming just to recoup previous losses. But I feel as if Forex was designed for martingale. With the way margin and currency is traded, you can go down to the minuscule scale and leverage margin in order to scale up. In this way, we can minimize our risk. And consider the fact that we will WIN at some point, these two factors makes for a GREAT underlying money management strategy as long as we work out the kinks and workaround the downfalls.
Key Points
1. Micro Lots: We use micro lots to increase the length of consecutive losses we can sustain
2. Split Balance: We divvy up our capital into different accounts to not leave anything to chance or luck. Getting 15 consecutive losses is RARE but EXPECTED. So when it does happen, we will only lose $1,000 rather than sacrificing our entire account balance. If our combined account is $5 million, losing $1,000 is only losing 0.0002% of the account balance, VERY small risk!!! This is the POWER of this martingale system.
3. Risk/Reward: As with any trading strategy, we need good fundamentals. Our underlying automated strategy must be over 50% winning AND have a Risk/Reward of 1:2. Profit must be in the 50-100 pip range with daily trades being taken. We can trade this on any currency pairs and timeframes to increase trading opportunities and reduce risk.
4. Automated Trading: Using the above stats, we need to make this into a EA (since it's impossible to manage hundreds of MT4's at the same time). We need a automated strategy that works well with my stipulations for Risk/Reward and win rate, there are few out there, not many. Hell, there's a 50/50 chance during a coin flip. You can even buy/sell based on yesterdays high/low during the Asia session and probably have the same 50/50 odds of winning if you use a static TP/SL (100:40). Maybe we can use this type of strategy for backtesting purposes or even for forward tests. I'll have to write some C++ code to turn this into a full fledged EA that can be deployed on thousands of MT4's; it'll take time but not impossible.
5. PAM Account: Use PAM strategy for acquiring the capital to fund this type of martingale strategy. This is the last stage of development in order to see real money. Remember that money begets more money and the best strategies can only work if massive capital is involved. So in this way, we must think bigger and not smaller in order see consistent gains that incurs less risk with the more money we accumulate (this is the secret to long-term wealth generation).
Who's up to the massive challenge of proving me wrong?
