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Martingale and Anti-Martingale Trading Strategies
2022-04-25 • Updated
Trading requires managing several important things. A trader needs to choose which instruments to trade, what strategy to implement, how much to risk on a trade, and how to manage this trade. The Martingale and Anti-Martingale strategies focus on a size of a trade, which is, without exaggeration, the fundamental question in the matter of stable earnings.
What Is Martingale System?
The Martingale system is a well-known method of making bets. It was initially intended as a gambling system. However, traders can apply it to financial markets. At the basic level, the idea of the Martingale betting strategy is to double the position size after each losing bet. It’s necessary to continue this process during the sequence of losses until a winning bet appears and recovers all the previous losses.
To illustrate this idea better, consider a gambling game like roulette. Let's assume we bet $100 on red. You’ll win $100 every time a bead lands on red. Similarly, you will lose $100 every spin a bead lands on black. Based on the Martingale system, when the result is positive, you need to start all over again with a new $100 bet.
On the other hand, if the result is negative, you will lose $100. In this case, you’ll need to double your bet on the next spin, which is equivalent to $200. If a second spin also fails, you’ll need to double your bet again. This process will continue for as long as it takes to achieve a positive result, which will recoup all the losses you incurred during the losing streak.
Does Martingale Strategy Work In Trading?
Let’s adapt this Martingale money management for trading. Assume that you are opening a position in the Forex market in XAUSD. Your trading strategy has a one-to-one risk-to-reward ratio, and you typically risk $200 per trade. In this case, every winning trade will give you a $200 profit, while every losing trade will cost you $200.
Every time you achieve a positive result, i.e., a winning trade worth $200, you should place $200 on the next trade. However, if your trade fails, you should double your lot size. If you lose on this trade, you should again double your bet size and risk $800 on the next one and so on until you make a profit. A winning trade will recoup all the losses you incurred during your drawdown period.
How To Use Martingale Strategy Effectively?
This strategy better fits traders with large capitals. Below you can find all the steps you need to take to achieve a better result:
- Pick the asset to trade and a timeframe.
- Determine the basic position size.
- Place your buy or sell order.
- Set your fixed Stop Loss and Take Profit levels with a 1:2 ratio.
- You either win or lose when the Take Profit or the Stop Loss gets triggered.
If your trade hit Take Profit, go back to step three and open a new trade. If you lost, double your position, and start again at step three.
You can immediately see the alleged appeal of the strategy as it provides you with a predictable hypothetical outcome under specific conditions.
Secondly, with the Martingale strategy, you don’t have to try and predict price direction or market trends since you’re guaranteed a profit from every win.
What Is Anti-Martingale System?
The Anti Martingale system is the inverse of the Martingale system described earlier. The strategy offers a trader to reduce each bet by half after every losing bet and increase each bet by doubling it after every winning one.
The Anti-Martingale system helps magnify the overall profits during a winning streak and minimize losses during a losing one. This strategy increases risks as the account portfolio grows and decreases them as the account portfolio enters a drawdown phase. This strategy is much better to use in the financial markets than the Martingale system as it’s a logical money-management model with much more practical use for a trader.
Many trading strategies and systems within the Forex and Futures markets are based on some variation of the Anti-Martingale approach. Many swing trading and trend following models tend to be quite conservative in their position size allocation when the system has been experiencing losses.
On the contrary, when the trading system finds the right environment and benefits by realizing a series of winning trades, it allows more risk to be taken.
The most experienced traders realize that one of the most important components to success in the market is a trader’s ability to manage risks. The Anti-Martingale system has built-in mechanisms for reducing risk per trade and thus ultimately reducing the risk of ruining a trader’s account.
Vice versa, Martingale is a more aggressive and risky money management model. That’s why you need to be accurate using this strategy.
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