The betting strategy dates all the way back to the 18th century. The system is named after John Henry Martindale. He was the proprietor of multiple gambling properties in the UK.
What is the Martingale Betting System?
The Martingale system is one of the oldest known betting strategies. The strategy can be used in any game as long as there is an equal probability of a win or loss.
In this strategy, the player doubles his bet every time he faces a loss. Consider a player betting on the toss of a coin. He bets $100 on head in his first bet and the outcome is tails, his next bet is for $200 and he faces a loss again. The player then bets for $400 and wins. The flow of funds for the trader in this scenario would be (-$100 –$200 –$400 + $800) netting a profit equal to his initial bet of $100.
The player would end up on the winning side after a profitable bet no matter how many bets were lost prior to the winning bet.
Martingale System Variations
Mini Martingale System
The Mini Martingale system limits the amount of double-down bets in order to avoid the huge losses. It’s harder to lose your entire bankroll this way and will spread out the process, but the profits are smaller.
Reverse Martingale System
Rather than doubling after losses, the Reverse Martingale system calls for doubling down after wins. This also prevents the big loss and can be successful, but the key is knowing when to stop – any loss means you lose all those profits accumulated through doubling down on wins.
The twist here is that while you’re employing the same principles of the Martingale Strategy, you add an additional bet unit after every loss. This means if you lose four hands in a row, winning the fifth will bring more profits than the original Martingale betting strategy. You’ll recoup all the bets you lost and add an extra unit on the winning wager.
The problem here is the same as the standard Martingale Strategy – you’re risking big losses and need to stay under the wager limit while increasing bets at an even faster rate than the original system.
Martingale Strategy and Forex
Martingale Strategy is highly popular in the forex currency market. It is because currencies, unlike stocks, rarely drop to zero. There will be times when a currency falls in value. However, even in cases of a sharp decline, the currency’s value rarely reaches zero.
The Forex market also offers another advantage. The ability to earn interest allows traders to offset a portion of their losses with interest income.
Limitations of Martingale Betting Strategy
The bet size significantly increases after the initial few bets.
If you run out of cash then, you have to make a premature exit from the strategy. In such a scenario, your losses will be catastrophic.
If you are using this strategy while dealing in the stock market, there’s a good chance that the stocks would stop trading before you could even recover your losses.
The risk –reward ratio is not favorable. A player using the strategy keeps on betting higher amounts with every loss. However, his final profit would be equal to his initial bet size only.
The strategy does not consider the costs associated with every trade such as brokerage cost and impact cost. These costs are a significant figure as you increase your bet size.