Why Martingale Strategy Is Dangerous

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Explain what is martingale strategy and why it is dangerous in trading.
 
Chathusanka Yamasinghe:
Explain what is martingale strategy and why it is dangerous in trading.

Because at some point you will run out of margin and money, with a destroyed account.

 

You can crash & burn any account with any strategy.

So this is the same for other strategies as well.

You can also for once focus on the advantages, in stead of always focusing on the negative things,

You don't have to worry about entry points.

You are always in the market so you don't have to worry about missing out the bigger movers.

You can calculate the exact point of total destruction, which is the closest you can get to predicting the future.

And so you can decide to pull the plug well before that event happens, even making it controllable, by controlling your losses, which is what trading is really...

So it's easy to start shouting BAD! and DESTRUCTION! whenever martingale pops up, but that is very narrow minded.

Martingale is just another tool to practice the art of trading.

Actually, i believe practicing martingale is better for the new comer, than wildly and randomly throwing whole lots at the market, also resulting in huge losses,

Burning one after the other demo account, without knowing why or what to do and what is really going on.

In that case i believe, martingale can be a good tool for education, because it will show levels on forehand so you can develop a sense of lotsize over movement.

 
Marco vd Heijden:

You can crash & burn any account with any strategy.

So this is the same for other strategies as well.

You can also for once focus on the advantages, in stead of always focusing on the negative things,

You don't have to worry about entry points.

You are always in the market so you don't have to worry about missing out the bigger movers.

You can calculate the exact point of total destruction, which is the closest you can get to predicting the future.

And so you can decide to pull the plug well before that event happens, even making it controllable, by controlling your losses, which is what trading is really...

So it's easy to start shouting BAD! and DESTRUCTION! whenever martingale pops up, but that is very narrow minded.

Martingale is just another tool to practice the art of trading.

Actually, i believe practicing martingale is better for the new comer, than wildly and randomly throwing whole lots at the market, also resulting in huge losses,

Burning one after the other demo account, without knowing why or what to do and what is really going on.

In that case i believe, martingale can be a good tool for education, because it will show levels on forehand so you can develop a sense of lotsize over movement.

Marco all your points are true, but for the experienced trader, who know where to put the limits and employs a strict money management.

In the hands of a beginner, Martingale can become disastrous as all strategies of course, again you have a strong point there!

 

It might be a little out or the scoop here but I would like to break it down from the perspective of how an Expert Advisor (EA) can work with martingale. I am using averaging down (aka. smoothed martingale) with many options in 2 of my EAs. My experience over 10 years has proven that it can be quite effective if used wisely.

If we first of all look at the Martingale concept it can be worth mentioning that it in its original definition is meant to be used by exponentially increasing the lot size. Normally by open the next order by doubling the previous order’s lot size. This is the dangerous approach if used in an EA. It does not matter if the back testing one year back will show positive results. The account will be blown sooner or later anyway. A proper news filter can postpone the blow but by time a geopolitical or similar event will do it.

One option to prevent an account blowout is to use a so called lock order. The EA will then be instructed to open a max amount of averaging orders. If price continues in the wrong direction the EA will open the lock order instead of opening the next averaging order. The lock order is an opposite order where the lot size will be the sum of the lots from all averaging orders. By doing this the loss will stay fixed. No matter if the price continues or reverses. The EA will then be set in suspended mode until manual action has been taken. In the case of price continues in the wrong direction then a manual action would typically be to wait for the price to reach a supply/demand zone and at that point close the lock order with profit, thereby resuming the EA.

The second, fully automatical, option is to use linear increment of the lot size. Let us say that the first order was opened with 0.01 lots. The following averaging orders will then be opened with 0.02, 0.03 lots and so on. This will very much slow down a possible margin call process and the price will reverse before that happens. Of course the EA must have a proper risk calculation based on the account balance or equity so that there won't come to an endless opening of orders.

One key for success, whatever strategy mentioned above, is to use a big enough grid distance between the averaging orders. Not a fixed distance which will be common for all pairs. In my EAs I am using Average Daily Range (ADR) as the base value. From that I am using a divider. Typically a value of 2-4. For instance for one of the most fast moving pairs GBPJPY I am using divider 2 (using a higher value would have blown the account 2 times since year 2010). So if the ADR for the last 20 days was 130 pips then the EA would use a grid step of 65 pips.

Another key for success is to use the distance in combination with time frame, typically the H1 time frame. So if the distance would have been reached already after 2 minutes (after news for instance) then the EA will wait until a new H1 candle has been opened until the averaging order will be opened. The distance at that moment must of course still be >= 65 pips, if we stick to the GBPJPY example above. By doing this you will avoid an account blowout. Remember the UK elections last year which came out unexpected. Then there was a 250 pips move within a couple of minutes. By having a time frame (candle) delay only one averaging order would have been opened instead of for instance 5.

 
Any strong trend can be blow up your account in Martingale strategies
 
Any strong trend can blow up your account.
 
Ahmet Metin Yilmaz:
Any strong trend can be blow up your account in Martingale strategies

Theoretically yes. But I have been using one of my EAs with linear averaging for 10 years now on 10 different pairs. And most important. Strictly using the rules I mentioned above. So far max DD 40 %. Start lot size 0.02 and initial deposit $5000. Shuttting down the EA last 2 weeks in December and first week in January + at elections. But you never know what the future will bring of course.

 

Martingale consist in increasing lots each time you lose.

Strict martingale consist in doubling (x2) lots each time you lose

So yes it is dangerous, you always end up with 7 to 13 loss in a row ,

and your account always blow up

 
Chathusanka Yamasinghe: Explain what is martingale strategy and why it is dangerous in trading.

Taken from another thread ...

Forum on trading, automated trading systems and testing trading strategies

Martingale, Hedging and Grid : MHG

Fernando Carreiro, 2017.09.05 01:59

On a Cent account, your gains are also in cents and therefore 100 times less that normal accounts but still limited by the same maximum number of lots that brokers allow (many have a limit of 100 Lots and many others a limit of 50 Lots).

The following table for a normal account shows how quickly it can "blow" your balance, trading for example on EUR/USD or GBP/USD or many other xxx/USD currency pairs:

Consecutive Martingale Orders
Lots
10 pips loss
100 pips loss
1
0.01
$1.00
$10.00
2
0.02
$2.00
$20.00
3
0.04
$4.00
$40.00
4
0.08
$8.00
$80.00
5
0.16
$16.00
$160.00
6
0.32
$32.00
$320.00
7
0.64
$64.00
$640.00
8
1.28
$128.00
$1,280.00
9
2.56
$256.00
$2,560.00
10
5.12
$512.00
$5,120.00
11
10.24
$1,024.00
$10,240.00
12
20.48
$2,048.00
$20,480.00
13
40.96
$4,096.00
$40,960.00
14
81.92
$8,192.00
$81,920.00
Max Lots (on many brokers)
100.00
$10,000.00
$100,000.00
PS! Actually my table is conservative, because losses are cumulative, so actual values are double the losses shown on this table!
So, draw your own conclusions!!!
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