Martingale in Trading – Pros and Cons
Success in Forex trading has very much to do with traders’ psychology and how they react to various market conditions. The thing is that the market almost always goes in the opposite direction after a trade is initiated, making the psychological trading component essential to success.
The Forex market is no different than other financial markets in respect to the attitude towards trading. As it turns out, the one factor that makes the difference between winning and losing is the approach to trading, not the actual trading strategy.
It is said that pessimism and optimism drive people’s decisions to risk more or less. If that is true, Forex is the first place to see that as it is the most liquid market, 24/5 open, and volatile enough to attract many investors.
Human nature, therefore, plays a key role when trading. Unfortunately, it plays tricks on us both when the market goes against, or in our favour.
When the market goes in the trader’s favour, greed steps in. The trader begins to question the logic behind the trade, starts thinking of the profit already in the account and doesn’t let the trade to run its natural course. In other words, greed makes traders close trades earlier than the initial plan, which is as bad as not cutting the losses.
What is Martingale and Is There a Right Approach to It?
Martingale is a Forex strategy used to cover up for the losses in a trading account. More precisely, when the price goes against the intended direction, traders do not cut the losses.
Instead, they add more to the initial position, aiming at recovering the loss if the market pulls back even a bit.
A Forex trading system based on the Martingale approach is risky. Usually, any trade should have a take-profit and a stop-loss level. With the Martingale approach, traders don’t use a stop-loss.
Instead, they intend to add more to the position, typically trading in larger volumes. In a bullish trade, traders add to the long side every time the market pulls back. The aim is to get the very best price average possible and only a small move in the right direction will cover the losses in the blink of an eye.
Apparently, the strategy works until it doesn’t. It is based on the overall assumption that the market corrects only for a while and it will eventually bounce. However, sometimes it doesn’t bounce.
And, during those times, the trader’s account size is the one that makes the difference between winning and losing.
For the Forex broker, more commissions and fees come from traders using Martingale. However, due to its riskiness, traders are more likely to get a margin call rather than survive for a long time on the currency market.
Because the Martingale approach basically means to keep adding to a losing position in the hope that the market reverses, the risks associated with it far outpace the benefits. It may work for a while, mostly when the market consolidates, but in the end, the traders end up busted, putting their account in great danger. For this reason, the Martingale system is considered to be popular among rookie or beginners traders, as savvy ones know the risks outpace the benefits.