Martingale Strategy Applied to Binary Options

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Martingale

Martingale is a popular form of betting strategy and often used in binary options; read on to find out why you should not be using it.

The Martingale Method

A martingale is one of many in a class of betting strategies that originated from, and were popular in, 18th century France. The simplest of these strategies, all intended for gambling and gaming, was designed for a zero-sum game, that is, a game in which each side bets the same amount and wins and losses are absolute. If I win, I win all, if you win you win all.

The basic strategy has 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. In today’s world the martingale strategy is most often applied to roulette as the probability of hitting either red or black is close to 50%.

The idea behind the martingale is a simple one: Double your previous loss until you eventually win, resulting in profit no matter what, as long as you are capable of going the distance. The only limiting factor is the size of your account, so long as you can make the next trade you have a 50/50 chance of making all your money back.

What Martingale really does is remove the need to understand the market, technical analysis and trading because the only thing that matters is the outcome of the next trade. All you have to do be able to make a trade, and then double it if you lose.

Martingale is nearly a sure thing as your chances of producing a win grow with each consecutive trade, assuming of course you have an unlimited amount of time and a bank roll big enough to make whatever the next trade needs to be without going bankrupt. The danger lies within those assumptions.

To some, the martingale system seems pretty fail-safe, especially for newbies, but that is a popular misconception. If used incorrectly it can quickly compound ones losses to the point of catastrophic failure. The best thing to do is to use a sound money management technique like the Percent Rule to ensure that no single trade is so big it wipes you out. Save Martingale for having fun at the casino.

Why Martingale is not a good idea for Binary Options

Now with digital options there are some things you have to take into consideration. Number 1, you must be aware of the payout percentages because binary trading is a minus-sum game. You never win as much as you bet. Because they are less than 100% you must increase your stake with that in mind so you cover your previous loss and gain a profit equal to the initial trade, otherwise you will end up losing no matter what happens.

  • If you place a trade for $100 and lose it, then make a trade for $200 and win 85% you only get back $370, covering your cost($100 +$200) but only winning 70% of your first trade.
  • If you went to a third trade, a $400 trade, you would return $740 but only profit $40 or 40% of the initial trade.
  • If you took it to a 4th trade, only doubling the trade size, the profit shrinks again and will turn into a net loss on the 5th trade.

The real risk here is that with each trade, to ensure that you do not end up losing, you have to increase you stake by more than 100%. This means that your potential losses grow exponentially with each trade. The first trade is 100%, then the second is 100% +115%, then the third is 215% + 250%, then the fourth is 465% + 500% so that your first trade is X amount of dollars, and your fourth is nearly 10X dollars and growing with each trade until your account cant handle it any more and you are wiped out of the market. In the end, Martingale is not trading to win, its trading not to lose.

Martingale Strategy for Binary Options

What do you think it takes to earn money in binary options? There are a variety of opinions. It is important to understand how and what is happening on the market, and to have the ability to make profitable deals. Even simple luck is essential. Every day, a huge number of new people are involved in options trading, but we must say that this trading won’t become a source of primary income for every one of them. This is logical and understandable. To achieve something, first you need a strong desire to acquire knowledge about how to achieve it, both in theory and in practice.

For gamblers who are accustomed to the thrill and dreaming of quick money in a form of an unexpected big win, trading binary options is a very attractive pastime option. Plus, there is a very interesting option – players can limit their risks and also buy options at different prices. This partly controls the process, in particular, and their bets. This allows you to use binary options trading with many of those techniques that are specific to gambling. For example – the Martingale strategy.

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Martingale Strategy

In general terms, the strategy is quite simple. You start to play (and in this case, it does not matter what – cards or options), placing the first minimal bet. If you lose, then the next bet doubles. If you lose again, double again, and so on, until the moment when you finally win. If you win, then you start again from the beginning, with a minimum bid. This strategy has been used since the old times by players in different games of chance – from the «coin» to poker and much more complex card games.

Pros of Martingale strategy

The main plus of the strategy is that it allows you to properly manage your deposit (score and the amount of money in your wallet). If, after winning, the bet is doubled again, this could result in the loss of all that you have won previously. And if you use the Martingale strategy, theoretically, you will always win.

In addition, the strategy justifies itself, because the probability of winning ten times in a row, and the probability of losing ten times in a row is very small. For the Martingale strategy, the second statement is a principle. Since losing ten times in a row is very difficult, the chance that you will win sooner or later is very significant. And the more you play, the higher the chance that the prize will finally come to you. Especially if you’ll be doing business based on a trading strategy and the indicators, there are many strategies the provide 7-8 good deals out of 10. If you play Martingale strategy, in most cases you will be able to be in the green.

Cons of the Martingale strategy

As for the minuses of this strategy, there are several. Let’s list them.

First minus – it works perfectly when you have a lot of money. But, for example, if you play in the casino with a thousand of dollars and you lose a hundred, then two hundred, then four, you cannot continue to successfully use this strategy without recharging your deposit. But you’ve only lost three bets which isn’t a lot. In options trading, the situation is the same. Unlike most trading strategies, which strictly forbid risking more than 5-10% of the deposit at a time, the Martingale strategy generally does not specify the size of bets. It can be any size, and the more times you have lost (and the larger the scale of your bets), the more money that will be required with each new deal.

Another minus – the Martingale strategy cannot work where luck is second most important thing and ability or knowledge is the first. For example, at the races, where it is very important to know which horse is stronger and who the rider is, whether these two have health problems, etc. It is equally important to take into account market trends and trends when trading, and if you do not do so, then you won’t notice the obvious things for most traders, and it will be like swimming against the current or trying to manage a balloon while ignoring the wind. Logically, it does not always lead to a successful outcome.

The third minus of this strategy is a small profit. If you have lost $10, then 20, then 40, then won $80 – then you in fact just won a first bet of $10. That is, you have only won your initial minimum bet. So the Martingale strategy is not a tool to instantly create a huge amount of money, but only one of the tools for continuous and painstaking work with binary options.

Application of Martingale strategy to binary options

Only an inexperienced player will use the Martingale as their only strategy to fool the market. If I want to use the Martingale strategy as my only strategy, I would prefer to choose a sport or blackjack for investing of money, because these are more interesting options than the complex financial instruments. We must use the Martingale in combination with other methods of trading. For example, if you are a Price Action trader, you can often predict the market in the right direction, but you will continue to lose, because you do not understand ways to manage your money. In this case, the Martingale strategy can be useful for you, because it has a fixed money management system in place; all you have to do is to apply it accordingly.

Conclusion

If you do not have a large sum in your pocket, the Martingale can hurt you. If you are not emotionally stable (or you are just starting to trade), stress can accompany the use of this strategy, since your losses can be very high.

On a positive note, you still will have a slight advantage, because the currency never devalues to such an extent as to reach zero. This means that at some point, the price of the currency will become stronger than before, so if you complete your work, you will theoretically become the winner. But that’s only if you could handle very large hits during losing periods, as mentioned earlier. Another advantage for binary options traders who trade on currency pairs, is that the currency, in terms of savings, will to grow over time. Therefore, many binary traders tend to buy the currencies that carry a higher interest rate than others so they can obtain profit over the long term, using the Martingale strategy to cover their losses.

In conclusion, the Martingale can be a wonderful method of earnings, if properly used, but it can also be a destructive method, when used blindly. Therefore, it is advisable to always think carefully and remember that the first thing you need is experience, which is achieved through mistakes. You have to have this experience before applying any trading strategy.

Binary options trading by Martingale strategy

The martingale strategy in binary options — a very dangerous tactic, which in unskilled hands almost in a matter of moments is able to zero out the deposit. But in the hands of a professional this strategy is one of the most simplest and profitable. Despite the fact that martingale is often criticized because of the huge risk, for example, in the Forex many expert advisors are built on its principles (Boomerang, Cash Hummer). So you just need to understand how to use it, as we’ll continue.

The basics and principles of the martingale strategy

The martingale strategy in binary is simple for understanding and complex at the same time. Its essence is that in the case of an erroneous forecast the next bet is doubled. And so as long as the prediction will be correct. Example. There is a deposit in the amount of $ 100. We do forecast in the amount of $ 2 and use the martingale in case of error:

  • stake 1 — 2 USD. A loss, double the bet;
  • stake 2 — 4 USD. In case of success and option profit 90% profit is 3.6 USD, recouping the previous loss. Net income is 3.6-2=1.6 USD;
  • stake 3 — 8 USD;
  • stake 4 — 16 USD;
  • stake 5 — 32 USD;
  • stake 6 — 64 USD (the may may subject to additional deposit of 26 USD).

At this point, for the previous 5 bets loss would have been 62 USD, 6th forecast would be the last. If it failed, then in 6 predictions we’d lose the entire deposit in 100+26 USD! If the 6th forecast would be successful, then we would have earned 64*0,9=57,6 USD. But the total loss amounted to 62-57,6=4.4$. By the way, the profit we could get only to the 4th, inclusive of the forecast (total loss of 3 forecast — 14 USD, profit — 16*0,9=14,4. Profit — 0,4 USD).

If we started with a sum of 4 USD, the breakeven point again would be the 4th prediction: the loss amounted to 4+8+16=28 for a profit of 32*0,9=28,8. Similarly, to start from 8 USD. This means that while the yield of 90% could be start with any amount of profit we would have received anyway under the condition that at least one of the 4 trades would have been profitable.

Important! One of the main rules of risk management states that risk per trade should not exceed 2% of the deposit on the deal. And if in other policies in exceptional cases it is possible to increase it to 5%, then in martingale strategy in binary options it is not recommended to do this!

Advantages of martingale strategy:

  • tactics has nothing to do with technical indicators and fundamental analysis. However, if you apply it in its pure form, but it’s just not recommended (why, I will explain below);
  • with the right construction of a mathematical model and a gradual increase in the lot of the losses can be offset.

Conditions for trading with Martingale method

Two main conditions:

  • the trend must be clearly rising or falling. Moreover, it is better not to take the period of expiration of 60 seconds, because even the upward trend is never a straight line;
  • deposit amount must be several times greater than the amount of the bet.

The martingale strategy in binary options is often used together with technical indicators determining the direction of the trend and its strength (trend indicators and oscillators). It is the combination of these tools (and not a martingale separately) able to make a profit.

And the second important aspect is the testing strategy. Any strategy should be tested on a demo account and analyzed (the optimal testing period is 6 months). After the analysis you will see the average number of losing trades consecutively and will be able to calculate the required magnification ratio of the bet.

An example of curve of the deposit on the successful implementation of the strategy of the martingale

Main moments when it is better not to trade with this method

The use of the martingale strategy in binary options is not recommended in the following cases:

  • when the market is flat — horizontal movement of the trend. This suggests that the market is experiencing a lull or investors or they are unable to determine the prospects of the asset. The possibility of chaotic price movement at this point, the biggest risks make mistakes in the forecast of the maximum;
  • when the amount of the deposit is less than 4-fold amount of the minimum bet. For example, if the minimum bet is 10 USD the deposit sum is 40 USD and less.

Example of curve of the deposit of Martingale strategy with the deposit loss

Martingale Calculator

From the example at the beginning of the article is shown that a simple doubling of the rate leads to a loss after the 4th prediction. So each subsequent bid must be increased by a factor of more than two-fold difference. Since this ratio depends on the profitability of the option, it makes no sense to calculate it manually each time. Open any martingale calculator, indicate the first rate, the yield of the option and receive rate values that need to be done. By driving the data from our example we get the following result:

An example of trading by Martingale

Take the demo accounts in the amount of 10 thousand USD. The yield of an option — 90%, trying to drive a bet of 100 USD and yield in the calculator and get the following grid rates: 100, 225, 506, 1139, 2563, 5767. Try to trade.

In this case, we were lucky immediately on the second transaction. The first $ 100 proved unprofitable, the second in the amount of 225 dollars brought an income of 405 USD, covering the loss of the previous deal. Despite the fact that the strategy requires a large deposit, the probability of 6 consecutive losing trades are very small.

Are you ready to trade in this method?

To understand whether you are ready to trade on the martingale system, answer the following questions:

  • Is everything clear from this article? If not, write your questions in the comments;
  • have you tested a trading strategy?
  • are you willing to accept the loss of the entire deposit?

If the potential losses are not confusing for you, but you have thoroughly understood the principle of the martingale, you are ready for this strategy. And finally, a few final recommendations:

  • Martingale is recommended to be used as a subsidiary strategy to the main tactics, based on finding a strong trend;
  • no need to try to increase the bet in 2 and more times. Based on the analysis backtest you will see a number of profitable and losing trades consecutively. On the basis of these figures you will choose the optimal magnification rate so that the number of subsequent profitable trades turned off the losses of previous ones.

If you have experience with this strategy, you have any suggestions on how to improve or on the contrary you consider it a loss, write about it in the comments!

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