Trading forex with a Martingale money management system will almost inevitably lead to blowing up an account. I’ve written about this inevitable outcomes repeatedly over the past six months. At the risk of beating a dead horse, I figured that visual proof would alleviate any lingering hopes once and for all.

Recall that Martingale systems aim to never lose money. Instead of accepting losses and moving on, a Martingale betting strategy doubles the previous bet. Whenever a win finally does occur, all losses up until that point are wiped out. The trade also gains the same amount of profit that the original trade hoped to capture.

The experiment assumes that the trader uses fixed fractional money management set at 1% of the account value. Recall from earlier experiments that a 1% risk value will almost never blow up an account after 200 trades. The percent accuracy for the trades remains at 50%, which is perfectly random. The random number file has been upgraded to include 10 million random numbers instead of the previous half a million.

The goal of the exercise is to focus on the risk of ruin rather than the profits accrued. As time goes on, the likelihood of ruin increases with the number of trades placed. A trade is each time a new transaction enters. It does not matter whether or not the last trade was a winner or a loser.

Fifty trades on most Martingale systems corresponds to anything from several days to several weeks. The level of aggression used in the trade level (i.e., the pip distance used to open a new trade) is what most strongly affects the amount of time required to reach fifty trades.

Placing 50 trades shows what most traders know. The returns look fairly nice at that point. A return of 20% on the account shows a 40% probability of occurring. The risk of wiping out the account looks meek at 8.5%.

Increasing the number of trades to 200, which corresponds to several weeks or months, the odds of outright failure skyrocket to 35%. The lucky traders that have not yet blown up show returns ranging from 20% all the way to 300%. The total risk is more apparent, although many traders fall victim to the lure of quick, large returns. If it all looks too easy at this point in time, that’s because it is.

Going out to 1,000 trades, which I roughly ballpark as the amount of trades an average expert advisor might complete in 9 months to a year, is where the inevitable result is obvious. The odds of reaching a zero balance reach 95%. A tiny handful of traders are floating huge returns. As the number of trades increases from 1,000 to 2,000 to 10,000, the tiny fraction of accounts left eventually dwindles down to zero.

bob says

Great stuff… could you possibly discuss what it would look like if you were to use an inverse martingale approach?

perhaps where you double up the size every time you win and when a loss finally occurs you drop back down to initial size.

Shaun Overton says

Hey Bob,

Thanks for your comment. You would certainly blow up an account increasing the risk by 100% after wins. The reason is that a loss would eventually occur. That loss would wipe out all gains to date, plus result in a loss relative to where you started.

Paul says

Using a Martingale sytem isn’t my favorite either. As you Shaun, I agree that it will blow up your account in time. One has to be prepared to say that a trade was wrong and close with a loss.

Bob has the idea of are reversed Martingale where you start a grid system when the market runs in your favor. Not a bad idea, but I would use it with a trailing stop on every grid order the reversed Martingale would open. That way, the grid orders would all close with a profit and so would the primary order.

It could be something like this:

Order 1: start protective stop at + x pips and open secondary order in the same direction with the same lot size.

Order 2: start protective stop at + x pips and open third order in the same direction with the same lotsize. Move the protective stop from order 1 by trailing etc….

Should the market reverse, then all orders would be stopped out by a trailing stop.

Could this work?

Shaun Overton says

Hi Paul,

I’m not sure. Using bell curve (Gaussian) statistics, the idea would definitely fail. Markets, however, follow power law distributions. They are far more wild.

The turtle traders in the 1980s used a money management system that’s almost identical to what you described. I recommend that you Google Turtle Traders and read through the pdf floating around on the web. It’s a very interesting money management idea.

Shunmas says

Hi Shaun !

Thanks for the great video. I really appreciate you proving the riskiness of Martingale system. Since you have that software/system using which you can test Martingale systems (and modified versions), can you please make a video on a martingale closing as basket of profit ?

For example, Open B1 0.01, if goes negative by 50 pips then open S1 0.03 and if S1 goes positive by 25 pips, it closes the whole run (both B1 and S1 all together as basket).

The example I gave you is a bit different from typical martingale because in typical martingale system, we experience the drawdown first. The example I gave, on the basis of pre-trade balance, there would be no drawdown in real.

Hope I have explained my example and point enough so as to make you understand the concept.

Looking forward to your new video. Thanks for being there. 🙂

Have a nice weekend.

Shaun Overton says

Hi Shunmas,

Thank you for the helpful comment. Your basket idea is really just probability shifting. The worse that the situation gets, you’re trying to increase the probability of a profitable exit by moving the take profit closer.

There’s not a fundamental difference between this and Martingale because you are tripling the risk while increasing the chance of a profitable exit. The compounding risk problem still remains. My off the cuff expectation is that this approach would likely speed up an account blow up.

Shunmas says

Hi Shaun !

Thanks for your reply. Yes you are absolutely right. Using the basket concept of trades closing with martingale is an absolute death run. But Shaun, lets assume, (AN EXAMPLE) if the account size is $5K and the leverage is 1000 (some brokers are offering this on micro account with the limit of 5 lots as maximum trade size per trade). Using 5K and 1000 leverage and trading the initial lot at 0.08 and multiplier of 2, and using this on GBPJPY pair, I don’t think we will blow our account. Or even assuming 0.04 initial lot, we will make profit. I do understand that we can’t make 500% in a year but still we can make 50% per year which is quite good a Return on Investment as compared to what is being offered at banks at the moment.

Your kind comments are highly appreciated as I feel really satisfied and having a feel of being educated by a true gentleman and professional. 🙂

Thanks.

Profound Regards,

Shunmas 🙂

John says

Hi Shaun

I used the Martingale Money Management system a while ago, and posted into a Forum that i’m using it. Then a Senior Trader which seems to have high experience wrote this:

“Don’t use Martingale, use the Kelly System instead”.

I googled about the Kelly Formula, which seems to be some formula to bet the optimal amount on horse races. However it’s not clear to me if this concept can be applied to Forex and if that’s even useful.

So my question is, could you write an article about the Kelly Formula which explains how it could be applied to Forex and if the formula is useful in any way? Would be great

Thanks Regards

John

Shaun Overton says

Hey John,

Thanks for the suggestion – that’s a great idea. I put the Kelly formula onto our publishing schedule for some time within the next month. Stay tuned!

gable says

Hi Shaun,

After loosing so much to martingale and other systems out there, you seem to know many strategies that doesn’t work. Kindly advise and encourage on the system that works instead.

Thanks

Shaun Overton says

Hi Gable,

You can follow my live results at myfxbook.com/members/Quantbar

Mike Cleveland says

Wow, that myfxbook looks pretty bad. Have you given up that method? Have you found any other method of trading profitably?

Shaun Overton says

It returned over 300%?!?!