If there is one 100% success guaranteed forex trading, it is the Martingale Strategy which is based on the theory of probability. In fact this has been in use since 18th century in various games such as roulette, poker, bridge etc. Well, if this is 100% guaranteed, why are traders often loosing money following various different strategies instead of this?
1. As I already said, this strategy works on the principles of probability. Both winning and loosing have equal chances and each attempt is independent of the previous one.
2. You will need to have one of the deepest pockets if you want to pursue this strategy in the same direction till you won. But unfortunately this requires, many times, infinite wealth and none of us are so rich that we can bet all our riches on a particular trend eternally.
How Does the Martingale Strategy Work?
Take the example of tossing coin where probability of both head and tail turning up is 50:50 and each new toss is independent of the previous one. Let us assume you call heads and bet $1 wager the first time and double it up each time you loose. This works out well if when you win, you will recover all your previous losses plus a $1 profit. But the flip side to the theory is the unpredictability of winning probability and if you are caught in a wrong trend, as in trading, which lasts for pretty long a time you will be bankrupt even though the prices could eventually trend back in your favor.
Let's apply the Martingale Strategy to the forex trading world. Every time you double down your stakes you are essentially lowering your average entry price. As an example, if you entered into euro/dollar position with 1 lot at 1.2650 and had to double it down three time at rates, say, 1.2590 and 1.2550, your average entry price equals 1.2596. This also means that you will breakeven at 1.2566 and not at the original rate of 1.2650 whenever there is a rally. But since you have doubled down the stakes three times, in our example, you will run out of money in case you just had just that and will be bankrupt to pursue this any more.
After all this, is it still effective for forex? Of course yes for the following reasons.
1. Currency never depreciates to zero unlike stocks
2. Countries never go bankrupt
3. Interest earning on rollovers can be used to offset losses partly; trading substantially high volumes result high interest returns which also reduce the average entry price.
