Most traders in the forex market wish they could lay their hands on one of the forex trading strategies that will make all their trades profitable. In the market, it is stated that the Martingale strategy falls into the wish bin. The basis of this method is probability. If you wish to use this trading strategy, you need to have deep pockets.
What is the Martingale Strategy?
This strategy gained popularity during the 18th Century when Paul Pierre Levy, a French mathematician, introduced it to the world. The strategy at the time was based on the ‘doubling down’ method. The final sections of this strategy were completed by a US mathematician by the name of Joseph Leo Doob. He completed it in an attempt to disprove the idea of a completely profitable strategy.
The strategy is based on placing one bet and every time you lose on a bet, you double the amount you are betting. If you stay at it long enough, you will eventually hit a bet where you will make up all the money you have already lost. This strategy was the reason for the introduction of the 0 and 00 on roulette wheels. It was introduced to increase the odds and break down the workings of this strategy. This caused betters to no longer expect to make profits in the long run which removed the incentive to make use of this strategy.
Martingale as Forex Trading Strategies
When you make use of this as one of your forex trading strategies, the idea is that as soon as you double down, your average entry price is lowered. If you were to purchase two lots of the EUR/USD, you will have the expectancy of it going from 1.263 to 1.264 to obtain a breakeven point. If the price goes down and you decide to buy four lots, the increase needed will only be to 1.2625, rather than 1.264 to reach a breakeven point. The more you buy, the lower the average price of entry becomes. Even if your loss is as high as 100 pips on the first lot when the price goes to 1.255, you will reach a breakeven point on all your lots if the pair rolled back to a level of 1.2569.
As you can see from the calculations, the strategy requires that you have a huge capital balance in your account. If your capital balance had been sitting at $5,000 when you commenced trading, it would all have disappeared before you reached the 1.255 level. The possibility of the currency movement turning against you is ever-present, but the main reason why traders stop trading is that they run out of funds before they reach that profitable level.
The main reason for the popularity of this trading strategy in the foreign currency exchange market is because currencies cannot drop to zero. Currencies often decrease in value, but will not reach zero. If you have the capital funding to use this strategy, you can make money by earning interest and try to offset some of the losses you may encounter. To use this strategy, you should consider buying a currency with a high interest rate and disposing of a currency with a lower interest rate. If you were holding several lots of this type of pair, the interest you earn could become quite substantial and it would aid in reducing the average of your entry price.
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