Originally, the Martingale strategy was a gambling strategy that involved increasing the bet amount after each loss. As a result, even after a string of losses, a single winning deal would wipe out all prior losses and guarantee coming out ahead. But while this strategy might boost your chances of trading Forex, it is a very dangerous strategy if you’re not experienced, as a long enough losing streak could see you lose all your capital.

What are Forex martingale strategies?

The mechanics of a martingale system involve a starting wager that is doubled each time you lose money, so then you recoup all of your prior losses with one winning position. Because it decreases your average entry price, the martingale method performs far better in Forex trading than gambling. Unfortunately, if you have a prolonged losing run, you will lose everything.

An easy example of a Forex martingale strategy to understand this trading technique

To better understand Forex martingale strategies, you need to understand that trades have two outcomes: a winning trade (outcome 1) and a losing trade (outcome 2).

Let’s say you plan to buy $100 of the EUR/USD currency pair in the hopes of achieving outcome 1. However, outcome 2 takes place instead, and you lose money on your trade. By following the Forex martingale strategy principle, you double the size of your losing position.

The transaction size is now increased to $200 in the hope of obtaining outcome 1. However, outcome 2 occurs once again, and the $200 is gone. And because you face a loss, your trade size is now $400, and so on until you reach the desired outcome.

Scenario 1 - You lose the first trade, but win the second one. In that case, you will lose $100 with the first position and win $200 with the second one, leaving you with a net profit of $100.

Scenario 2 - You lose the first two trades, but win the third one. In that case, you lose $100 with the first position, $200 with the second trade, and win $400 with the second one, leaving you with a net profit of $100.

Scenario 3 - You lose the first 3 trades, but win the fourth one. In that case, you lose $100 with the first position, $200 with the second trade, $400 with the second trade, and win $800 with the second one, leaving you with a net profit of $100.

And so on.

An initial Forex martingale position of only $100 can turn into a total investment of $3,100 after 5 trades, and $102,300 after 10 trades!

Risks and limits of Forex martingale strategies

One of the biggest risks of Forex martingale strategies is the potential for huge losses if currency pairs move against you for a certain period of time, particularly if you don’t have enough Forex trading capital to keep doubling your position after each loss.

This is even riskier if you’re using leverage in your trading, as it amplifies all price movements. While you can potentially earn more money quicker thanks to borrowed funds (leverage), you can also potentially lose more very quickly.

With Forex martingale strategies, the risk/reward ratio is very bad, which means that money management is usually poor. Remember that the risk/reward ratio is the relationship between the risk you take to get the reward.

Usually, it is preferable to seek out 1:2 or 1:3 ratios, where traders risk one to gain two or three. However, traders using Forex martingale strategies are risking one to win one, as they’re using a fixed risk/reward of 1:1 in this approach, which deteriorates over time as traders have to double their stake.

Tips when using Forex martingale strategies

If you decide to implement Forex martingale strategies in your trading, there are a few tips:

• Start your Forex martingale strategy with a small trade position and a low leverage effect to master the concept and avoid unnecessary risks.
• Do not open trading positions randomly. Have a sound trading plan to enter the market when real trading opportunities appear.
• Maybe you shouldn’t double your position when facing a loss, but consider a lower amount of money allocated for your new position, like a 1.5 multiplicator.
• Use stop-loss orders to avoid being caught in a trend reversal if the market continues moving against you.
• Consider stopping your Forex martingale strategy after a fixed number of losses.

• Start applying your strategy on a demo account to trade with virtual funds and refine your trading plan before using real money.