Daily Forex #49 - Martingale Your Way To A Million Dollars!

A few days ago I shared about how I accidentally stumbled on Forex and made a career out of it. To read that blog post, you can go HERE.

Yesterday (<-- Click this link to read yesterday's story), I talk about how Forex trading was suppose to be boring, like a job. If you think its glamorous or exciting, then that's the wrong mindset. It might seem glamorous on the outside but once you step into it, its not suppose to be.

Today I want to share one of the experiments I tried on one of my accounts. All my trading throughout the years are done on LIVE accounts. I don't use demo accounts to test my theories.

This experiment is the Martingale Theory. If you have been a trader before, you would know what it is. It is a double up, dollar averaging strategy. Let me give you an example.

Let's say you BUY a currency at 1.5000. If the price drops to 1.4000 and you place another BUY order, your effective price becomes 1.4500, (1.5000 + 1,4000)/2. Assuming you double your order size at 1.4000, now you have 1 part 1.5000 + 2 parts 1.4000. So now your effective price becomes (1.5000 + 1.4000 + 1.4000)/3 = 1.4333. So using the Martingale Theory where you double up your next entry, your effective price is lower. This means once the price goes up from 1.4000 to 1.4333, you break even. And if it continues up to 1.4500, you can exit with a profit.

What if the price keeps going down to 1.3000, then you double up on your previous size. So now you enter 4 parts 1.3000 and your effective entry becomes (1.5000 + 1.4000 + 1.4000 + 1.3000 + 1.3000 + 1.3000 + 1.3000)/7 = 1.3571. So if the price goes up from 1.3000 to 1.3571, you break even and if it continues up to 1.3775, you can exit with a profit. So even if you had entered a BUY at 1.5000 & 1.4000, you would have a overall profit when you exit all your positions at 1.3775.

A lot of traders love this theory but I must warn you to proceed with caution!

This is because some traders double up their entries too early. Some traders can't survive the drawdown because their lot size is too big. Let's look at this is dollar terms.

Assuming you start off with 1 standard lot. When you double up, its 2 standard lots and then 4 standard lots and then 8 standard lots and so on. Using the above example where we BUY at 1.5000, 1.4000 & 1.3000, when the price drops from 1.5000 to 1.4000, your running loss is 100 pips or $1,000 (1 standard lot position)

When the price drops to 1.3000, your running loss is 200 pips from the first entry and 100 pips for the second entry. So you will be losing $2,000 (1 standard lot x 200 pips) + $2,000 (2 standard lots x 100 pips) = $4,000. So if you are trading with an account of less than $4,000 you would have blown your account.

Let's say you have not blown your account and the price drops to 1.2000, your running loss will be 300 pips from the first entry, 200 pips from the second entry and 100 pips from the third entry. In dollar terms, that will be a running loss of $3,000 (1 standard lot x 300 pips) + $4,000 (2 standard lots x 200 pips) + $4,000 (4 standard lots x 100 pips) = $11,000. This means that even if you had a $10,000 account, you would have lost all your capital before the price turns up.

Therefore it is very important to ensure that you have sufficient funds to suffer a big drawdown, small enough lot size to ensure that you have enough margin to continue doubling up and also make sure you are not adding positions too close to each other. In Forex, it is not unusual to see prices move by 100 to 200 pips in 1 day and 500 pips or more in a week. Some Martingale traders hold on to their losing positions for weeks!

If you want to trade this strategy, I would suggest starting with a capital of at least $10,000 and a lot size of 0.01 or 1 micro lots. The profit and loss will not be big but this will ensure your account can survive a big drawdown. I would also suggest adding in positions every 50 to 100 pips. Many traders trade on the small timeframes and they see a 20 pips movement as very big, but that is too small if you look at the charts from the Daily timeframe.

Finally the most important point of today's article. Do I recommend Martingale trading?

A big fat NO!

Have fun! See you tomorrow!

Hope you enjoy today's blog post and if you have any questions please feel free to ask in the comments below and I will definitely respond to you.

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Daily Forex is my way of sharing my personal thoughts on the Forex Industry with would-be traders as well as current traders.

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Here are some interesting topics to start you off :

• Daily Forex #20 - Can You Really Make Money Trading Forex?
• Daily Forex #13 - Make Your First $100,000 Trading Forex
• Daily Forex #12 - Forex Is Not a Get-Rich-Quick Scheme
• Daily Forex #9 - 2 Main Reasons Traders Fail

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