Forex Robot Trading and Martingale Theory.
A winning combination or sheer madness?
Martingale is a theory which is often mentioned on the various Forex
trading forums.
Firstly a detailed explanation of the history of Martingale and what
is pertains to do is required.
Let us use a brief definition here
"Originally, martingale referred to a class of betting strategies
popular in 18th-century France... The simplest of these strategies was
designed for a game in which the gambler wins his stake if a coin
comes up heads and loses it if the coin comes up tails. The strategy
had the gambler double his bet after every loss, so that the first win
would recover all previous losses plus win a profit equal to the
original stake. Since a gambler with infinite wealth will with
probability eventually flip heads, the Martingale betting strategy was
seen as a sure thing by those who practised it."
I realise that the above is an overly longwinded description but the
basic synopsis is that in gambling every time there is a loss, then
you double the next bet. The assumption is that ultimately your luck
will change.
Can we as rational, unemotional and experienced Forex traders allow
ourselves to utilise this technique in our trading. Various Forex
trading systems and Forex trading robots claim to use this system.
In reality, those Forex trading systems and Robots invariably do not
hold to the true tenet of the Martingale definition, and they should
not.
Let us expand on this.
Assuming that we entered a trade with Stop Loss and Take Profit levels
equidistant from the entry price. If we take profit then no issues
arise.
If we lose then doubling the bet each time gives us the following situation.
1st loss – 2 times original lot size
2nd loss – 4 times original lot size
3rd loss – 8 times original lot size
4th loss – 16 times original lot size and so on.
At the 8th loss we are now at 256 times our original lot size.
What does this mean is actual money. Assuming we originally placed a
Stop Loss/ Take Profit at $10, we would at our 4th loss be down $150.
At our 8th level our original $10 risk would be down $2550.
Do we pull the plug here or wait for the 9th level. This is gambling.
Rational and successful Forex Traders would abhor this definition of
their trading style.
This defies all our trading rules about conservative trading with good
risk and money management.
One of the most widely mentioned Forex Robots utilising Martingale,
does in fact use a variation, which deserves further observation.
Namely, it will allow up to an 11th level, i.e., 11 consecutive losses
before exiting the trade. How they do this is, after entering the
trade, if it goes if the direction of the trade they will stay with 1
trade.
If the trade goes against them by a certain percentage,( they set up a
grid pattern for this), they will add another increased lot and so on,
and the price continues to go against them up to the 11th level.
What this means is if the original trade is for 0.10 lots, then the
subsequent is for 0.11 or 0.12 depending on the multiplier used.
At the 11th level up to 50% of original capital is at risk.
How does this work in practice.
My work on this has shown that it will maintain a good and impressive
profitability for a month or two and then "Shoot itself in the foot"
literally.
If you utilise this approach, and have 2 months of good profitability
and take a percentage of the profits out of the increasing capital
then it is fine, and you would consider yourself a truly accomplished
trader, balancing a sensible trading manner with an entrepreneurial
approach to the Forex market.
If on the other hand you hit the 11th level loss early in your trading
history with this style then you would consider yourself quite rightly
in error for not following the trading style required.
I have looked long and hard at this style, but must now reject it totally.
Please visit my website/blog for further comment and updates re. The
subject of Forex Robot Trading
Hmm.. A Good article !