Is the Martingale Money Management Good for Trading Derivatives?

Martingale is a risky strategyHaving a good money management strategy is essential in earning money through trading financial derivatives. You need to focus on minimizing losses and then on gaining profit using your demo balance. You will be left with some gains only when winning trades will exceed lost ones.

And what to do when you experience a loss? You have to think about how to adjust to such a situation to protect the capital that is left. You might think the best way to go would be to reduce the investment amount for the consecutive trades. Surprisingly, there is a strategy called the Martingale money management strategy, that advise the opposite. We will take a closer look at it in this article.

Key Takeaways🔑

The Martingale system advises increasing the investment amount after a loss to compensate.
While the strategy may seem effective, it can lead to significant losses.
Effective money management is crucial for trading, focusing on capital protection before seeking profits.


The basics of the Martingale money management strategy

The main rule in the Martingale system says you should increase the amount you put in a single trade every time you lose. So if one trade was lost, you multiply the investment amount for the next transaction. If you lose again, you will continue to increase the amount of demo balance that you will trade. And when you finally win, you will then return to a small initial investment amount.

Martingale position sizing

What is the reasoning behind such a trading system? Why increase the amount when you are losing? Martingale experts claim, that this is the best way to compensate for the loss. When you finally win, the amount will cover what you lost. If you put every time the same amount, or even lower, then the winning transaction will cover only part and you will end up in debt.

Some treat the Martingale strategy like betting. There are always 50/50 chances a trade will win or lose. Moreover, it is very unlikely to open an infinite series of losing transactions. And with every trade you make, the probability of the next failure diminishes.

Is the Martingale strategy applicable to trading derivatives?

Probability and psychology

Looking at the Martingale money management strategy from a probabilistic point of view, it is possible to apply it in trading all kinds of securities. There are always 50% chances of winning, as well as 50% chances of losing. Furthermore, it is not probable to fail forever, so with every transaction, you are closer to success.

Psychological aspects of martingale money management

Now, looking from a psychological point of view, the Martingale strategy does not look so good.

There is nobody who would be happy losing cash. Every trader should be ready for some losses, but when it happens continuously for a certain period of time, the fear and anxiety will grow. And these are the emotions that might interfere with decision making.

Negative emotions will also arise when a few transactions are successful and then, suddenly a big loss occurs. So the initial motivation and joy are replaced by disappointment and dismay.

No long term profitability is available

You need to have a massive initial capital at your disposal to use the Martingale system. You may open several small successful transactions and then a big loss can ruin your work.

The strategy assumes that the winning trades will offset the previous losses. But the profit that you will end up with may not be big enough to be a justification for a giant investment in this one-time trade.

Winning trades are not guaranteed

Martingale enthusiasts will persuade that it is not possible to get an infinite amount of lost transactions. However, it is possible to fail so many times that your resources will be completely exhausted.

While you may finally perform a winning transaction, it might be not big enough to cover the loss and finish the day with a profit on your account. There will be simply less and less money on your demo account.

The primary focus is on protecting your money

The first thing you should take care of is your capital and protecting them. You are a trader of financial derivatives and your money, even though it’s just virtual balance on your demo account, is the best way to make more profits for you. You obviously do not want to lose them.

This is a rule known to plenty of successful traders. You will not make more resources if you have nothing at all. So the first objective is to preserve whatever you have. Conversely, the Martingale strategy encourages to put in the trades a large part of your funds in the hope that a future win will be big enough to earn for you.

In the worst scenario, you will invest all that is left on your account in a single trade hoping for the best. And if it goes wrong, your account will remain empty.

The Martingale strategy on the Olymp Trade platform

The Martingale strategy can work. Nevertheless, markets are unpredictable and sensitive to news releases. The situation can change quite fast and it could mean a big loss for you. There is always a great risk in trading derivatives with the Martingale strategy.

Money management table for 7 trades
Money management table for 7 trades

Hints on how to apply the Martingale strategy to trading financial derivatives

The Martingale strategy is possible to apply also to trading this kind of security at Olymp Trade. But instead of throwing larger sums in every trade, you may use the following trading system.

Determine a fixed amount for one trading cycle

You do not have to risk all the balance from your account. It will be enough if you predetermine a quote that you are willing to invest in a specific cycle. For instance, you may choose a total of $200 for a trading cycle.

The amount of $200 can be further divided into $50 for the first trade, $70 for the next trade, and $80 for the last one. $200 invested in a trading cycle is only a fraction of all the balance on your demo account and you use these $200 until it is depleted. Note that trading has no guarantee and you can easily lose that money in an instant.

Calculate position size for next trade

So the first tip is to determine the maximum amount you are willing to trade in one cycle. And what is a trading cycle? It is simply a fixed time frame. Like in the previous example, during a downtrend you could choose to trade three consecutive bearish candles along with the trend.

A common thing about cycles is that the probability of a reversal of the trend increases when the price enters a cycle. And you cannot predict the exact moment it will happen. That is why you should do your best and gain as big a profit as you can during one cycle before the reversal of the trend.

For instance, when the price touches the levels of support or resistance, it can range, reverse, or break out. You do not know the time when it is going to happen. But as you have identified the level of support/resistance, you can test the market direction with the use of the Martingale strategy.

Even if you lose small amounts in the beginning, you will later identify the direction of the market and thus increase the probability of the winning trade for a larger sum of virtual money.

Pros and Cons🔄

👍Can potentially recover losses quickly
👍Based on sound mathematical probability
👎Requires substantial capital to sustain continuous losses
👎May lead to significant losses if a winning trade does not occur in time

Trading Strategy Details
Martingale Strategy This approach recommends increasing the investment after every loss to compensate for previous losses once a win occurs.
Anti-Martingale Strategy Contrary to the Martingale, this strategy suggests increasing the investment after a win and decreasing it after a loss, capitalizing on winning streaks and limiting losses.

The Martingale strategy works for longer transactions

The Martingale strategy can be a good choice if you are interested in staying in position for a longer time. You may wish to open 3 different positions during the day, in the morning, in the afternoon, and the evening.

Martingale money management table for 3 trades
Martingale money management table for 3 trades

In the morning you will use a small amount from your funds as it will be basically used to test the market.

In the afternoon, there is time to verify your earlier findings. If the trend is confirmed, meaning both trades won, you should trade in the evening in the same direction as during the rest of the day.

The advantages of such a system are plenty. You get enough time for the market analysis that is based on the outcome of your own trades. Then, you can use quite small amounts to test the direction of the market. All of this maximizes the odds of trading success.

The Martingale strategy is risky and I would rather not recommend it. But it has its advantages. Just you need to use it wisely and remember to have the right money management strategy. Never put a large part of your balance account on a single transaction. You need also to have some flexibility and emotions under control.

Wish you only profitable trades!

Q&A Section📚

  • Q:What is the Martingale strategy?
  • A:The Martingale strategy is a system that advises increasing the investment amount after each loss in hopes of recovering previous losses when a win occurs.
  • Q:What are the risks of the Martingale strategy?
  • A:The risks include significant losses if a winning trade does not occur in time, and it requires substantial capital to maintain.
  • Q:How does the Anti-Martingale strategy differ?
  • A:The Anti-Martingale strategy is the opposite of the Martingale. It suggests increasing the investment after a win and decreasing it after a loss. This approach capitalizes on winning streaks and limits losses.
  • Q:What is the best way to mitigate the risks of the Martingale strategy?
  • A:It is essential to manage your investments wisely, not to invest more than you can afford to lose, and to set a limit on the amount to be invested in a specific trading cycle.
  • Q:Is the Martingale strategy applicable to all types of trading?
  • A:While the Martingale strategy can technically be applied to any form of trading, it’s vital to understand the risks and psychological impact associated with it. It’s always best to use this strategy with a clear understanding of your financial goals and risk tolerance.


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Bart Bregman

Full time day trading, and helping out with Olymp Trade wiki in my spare time to create an awesome platform for beginners. I'm a digital nomad that travels the world while working from everywhere!

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