I have to say that I become a little bit irritated each time I go on line and have
a conversation with someone who argues in favor of martingale trading systems
or when I see an EA seller selling this wonderful martingale expert that gives a
100% monthly profit. For this reason I decided to write this post today, this post
will give all the arguments, once and for ALL that clearly show why Martingale
trading IS unprofitable and CANNOT be traded profitably in ANY possible way.
This analysis will also apply to any type of system with a similar progressive
money management scheme. Before continuing, this post is not meant to be rude
or mean against people who trade Martingale systems, this is merely to show you
that it is not reliable and will eventually lead to the loss of all your trading capital.
As you all know, the Martingale system, developed in the 19th century, is
a trading system in which a trader will double his stake when he loses a trade
resetting the count after he wins a single trade. What is the problem with this ?
Well, the first problem with this is the exponential increase in risk which make the
system eventually risk very large amounts of money for very small profit amounts.
I will now try to argument against each one of the points put forward by people
who trade martingales :
• If my account size is big enough it will not be wiped out. This is an awful
mistake. Martingale systems will always wipe an account because the increase
in risk is exponential while your increase in equity is liner. That is,
increasing your capital from 1000 USD to 10,000 USD does not buy you 10
more losing trades, it just means 2 or 3 more losing trades. However, you
will not lose 1000 you will lose 10,000 USD.
• But if my system has X maximum consecutive loses then increasing my
capital by Y will make the system safe. Wrong again. The fact that your
system has X consecutive loses in historical testing or live testing does not
mean it cannot havemore. All trading systemsmay face a very large number
of consecutive loses. In practice, you will never be able to sustain more
than 10 consecutive loses, something which is likely to occur with almost
any trading system. You are playing the deepest pocket game. In gambling,
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when two players are going for martingale strategies the one with the most
money wins. Who has the deepest pockets, you or the market ?
• Ok, I accept that my account will eventually be wiped out, however if I
withdraw my profits I will still win in the end. This is a very naive argument
in favor of Martingales. If wipe outs will always happen, which is the case,
the frequency in which these wipe outs happen is unknown, so for example,
you may get a wipe out in a month, then one next year then 8 the year after.
In the end, a series of wipe outs will remove all profits from the previous
runs in which the trader was lucky.
Can money be made from Martingale trading ? Of course, and money can
also be made in Vegas. When you trade a Martingale system which is statistically
shown to wipe any account and eliminate any accumulated profit either
through successive wipe outs of opened accounts or through the wipe out of a
single account with all the profit you are simply betting on its success. Gambling
is something that should not be done in trading. You know that there is a saying
in trading. If you are going to gamble go to Vegas, at least the drinks are free. If
you are considering or trading a Martingale take all the above points into account,
they are based on sound and proved arguments.