Forex Robot
Trading and Martingale Theory.
A winning
combination or sheer madness?
Martingale is a theory which is often
mentioned on the various Forex trading forums.
Firstly a detailed explanation of the
history of Martingale and what is pertains to do is required.
Let us use a brief definition here
“Originally,
martingale referred to a class of betting strategies popular
in 18th-century France... The simplest of these strategies was
designed for a game in which the gambler wins his stake if a
coin comes up heads and loses it if the coin comes up tails. The
strategy had the gambler double his bet after every loss, so
that the first win would recover all previous losses plus win a
profit equal to the original stake. Since a gambler with
infinite wealth will with probability eventually flip heads, the
Martingale betting strategy was seen as a sure thing by those
who practised it.”
I realise that the above is an overly
longwinded description but the basic synopsis is that in
gambling every time there is a loss, then you double the next
bet. The assumption is that ultimately your luck will change.
Can we as rational, unemotional and
experienced Forex traders allow ourselves to utilise this
technique in our trading. Various Forex trading systems and
Forex trading robots claim to use this system.
In reality, those Forex trading systems and
Robots invariably do not hold to the true tenet of the
Martingale definition, and they should not.
Let us expand on this.
Assuming that we entered a trade with Stop
Loss and Take Profit levels equidistant from the entry price. If
we take profit then no issues arise.
If we lose then doubling the bet each
time gives us the following situation.
1st loss – 2 times original lot
size
2nd loss – 4 times original lot
size
3rd loss – 8 times original lot
size
4th loss – 16 times original lot
size and so on.
At the 8th loss we are now at
256 times our original lot size.
What does this mean is actual money.
Assuming we originally placed a Stop Loss/ Take Profit at $10,
we would at our 4th loss be down $150.
At our 8th
level our original $10 risk would be down $2550.
Do we pull the plug here or wait for the 9th
level. This is gambling. Rational and successful Forex Traders
would abhor this definition of their trading style.
This defies all our trading rules about
conservative trading with good risk and money management.
One of the most widely mentioned Forex
Robots utilising Martingale, does in fact use a variation, which
deserves further observation.
Namely, it will allow up to an 11th
level, i.e., 11 consecutive losses before exiting the trade. How
they do this is, after entering the trade, if it goes if the
direction of the trade they will stay with 1 trade.
If the trade goes against them by a certain
percentage,( they set up a grid pattern for this), they will add
another increased lot and so on, and the price continues to go
against them up to the 11th level.
What this means is if the original trade is
for 0.10 lots, then the subsequent is for 0.11 or 0.12 depending
on the multiplier used.
At the 11th level up to 50% of
original capital is at risk.
How does this work
in practice.
My work on this has shown that it will
maintain a good and impressive profitability for a month or two
and then “Shoot itself in the foot” literally.
If you utilise this approach, and have 2
months of good profitability and take a percentage of the
profits out of the increasing capital then it is fine, and you
would consider yourself a truly accomplished trader, balancing a
sensible trading manner with an entrepreneurial approach to the
Forex market.
If on the other hand you hit the 11th
level loss early in your trading history with this style then
you would consider yourself quite rightly in error for not
following the trading style required.
I have looked long
and hard at this style, but must now reject it totally.
