What is the Martingale System? – Definition and Example


The Martingale System is an investment strategy where the stake is doubled after each loss, aiming to recoup previous losses with eventual wins. It operates on the principle of increasing position size following a decrease in portfolio size.

In simpler terms, it’s a betting system that relies on the probability of eventually recouping losses with a single winning trade, thereby maintaining a positive trajectory in investments.

Paul Pierre Levy introduced this remarkable system of investing in the 18th century to prove that only a single trade is required to keep the wheels of fortune moving.

Martingale System in a nutshell

  • The Martingale System doubles bets after each loss, aiming to recover losses with eventual wins.
  • In trading, it’s applied to manage risk and capitalize on trends, particularly in Forex markets.
  • Binary options trading with the Martingale strategy can quickly drain account balances due to its high-risk nature.

Understanding the Martingale System

The Martingale System is a betting strategy where the wager is doubled after each loss, with the aim of recouping previous losses and making a profit. In contrast to the anti-martingale system, where bets are split upon losses and doubled upon gains, the Martingale System focuses on progressively increasing bets after losses.

This system is designed to enhance the likelihood of winning bets while minimizing losses, operating on the principle of the ‘loss-averse perspective,’ which seeks to improve bets while also potentially increasing the risk of rapid losses.

Trading practices such as Forex trading is better suited to this kind of strategy rather than casino gambling or even stock trading. It is compared with gambling in a casino, as the bets are placed with the possibility of breaking even. Here, it is assumed that the gambler has enough money to support your bet, which is why you can increase your bet every time you lose in hopes of winning eventually. However, you could seriously lose your whole bank account while trying to win through this strategy.

Example of the Martingale System

The Martingale system might sound complex, but it’s actually quite straightforward. Let’s break it down with a simple examples:

Imagine you have a coin, and you’re betting a dollar on each toss, aiming to predict whether it will land on heads or tails. With only two possible outcomes, your chances are clear. If you consistently bet on one outcome, say tails, statistically, you’ll eventually win.

Bet NumberBet AmountOutcomeResultTotal Winnings
1$1HeadsLose $1-$1
2$2HeadsLose $2-$3
3$4HeadsLose $4-$7
4$8HeadsLose $8-$15
5$16TailsWin $16$1

In this example, the bet amount doubles after each loss. Despite consecutive losses initially, the win on the fifth bet covers the losses and returns a profit equal to the original bet amount.

Application of Martingale System in Trading

In trading, particularly in Forex markets, the Martingale system is often applied to manage risk and capitalize on trends. This strategy involves doubling down on positions to lower the average entry price, thereby potentially reducing losses. Let’s consider an example scenario with the USD/JPY currency pair:

USD/JPYLotsAverage or Break-Even PriceAccumulated LossBreak-Even Move
110.501110.50$00 pips
110.302110.40-$200+10 pips
110.104110.25-$600+15 pips
109.908110.05-$1,400+17 pips
109.7016109.88-$3,000+18 pips
109.5032109.69-$6,200+19 pips

This table illustrates how doubling down on lots progressively lowers the average entry price, enabling traders to break even with smaller movements in the market.

Hence, Forex markets use the Martingale system because stocks do not drop to zero, and there are no high losses or wins. There could be a decline in the value of the stock, but it would never reach zero, meaning that you will never have to suffer the harsh effects of zero.

Moreover, traders can actually borrow with a low-interest rate and then buy the currency that has a higher interest rate, confirming a constant flow of money without suffering much loss. Here, traders can also earn interest along with the winning money, which could cover any losses faced further in the trading journey. This ensures that your capital is not wasted on any loss.

Can you use the Martingale System for Binary Options?

Using the martingale strategy for binary options can be tempting, but it’s a risky move that could lead to significant losses. Originating from casino games, this strategy involves doubling your investment after a loss in an attempt to recover. However, applying it to binary options trading can quickly deplete your account balance.

Binary options offer a fixed payout upon successful trades. For instance, if you invest $100 and the payout rate is 80%, you would receive a profit of $80 upon winning the trade. However, if you lose and decide to double your investment to recover the loss, the subsequent profit, despite being a percentage of the doubled investment, might not cover the initial loss entirely.

For example, if you start with $100 and lose the first trade, doubling your investment to $200 for the next trade, if you win with an 80% payout, your net profit would be $60. So far, so good. However, if you lose the first three trades and win the fourth, you have a negative profit (- $60). Continuously doubling your investment with each loss can rapidly diminish your account balance, especially if a series of consecutive losses occur.

If you lose six trades in a row, your $10,000 account could be wiped out. Even with a factor of 2.3, you might exhaust your account after just five trades.

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So, is this strategy viable? Not really. It’s high-risk and can quickly drain your funds. Instead, focus on learning and practicing solid, consistent strategies with fixed investment amounts. This approach minimizes the gamble and maximizes your chances of long-term success in binary options trading.

About the author

Percival Knight
Percival Knight is an experienced Binary Options trader for more than ten years. Mainly, he trades 60-second trades at a very high hit rate. My favorite strategies is by using candlesticks and fake-breakouts

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