The Martingale System: Some First-Hand Experience...from Las Vegas, of Course

Since I first started trading forex I've been intrigued, impressed, and a little frightened by the concept behind the legendary Martingale betting and/or trading strategy. The Martingale approach works (theoretically) by recouping losses through the exponential increase of bets or trades after each successive loss. So let's say you place a 1 lot long trade with a 10 pip take-profit and 10-pip stop-loss. In this theoretical model, the odds of it going either way are 50/50, and we won't worry about the spread for the time being. (See, I'm already oversimplifying! A roulette table is actually a more straightforward model for this...as I'll demonstrate shortly.)

Now, let's say the trade goes the wrong way and you lose those 10 pips...in response, you place the same long trade (or the opposite short trade...if odds are 50/50, doesn't much matter) but double the size to 2 lots. Now you get it wrong again, and are out a total of 30 pips. Fearlessly, you place yet another trade, doubling the size yet again to 4 lots. Voila! This time you get it right, capturing a 40 pip gain, recouping those lost 30 pips and adding a 10 pip profit. You've just traded a very basic Martingale strategy in an oversimplified theoretical universe. And, heart pounding, you thank your personal pantheon of forex gods that you didn't get that last trade wrong, and the next one, and the next, and find yourself trading 32 lots at the very limit of your margin...and then lose again. Because that would be pretty scary. And you know that while it may seem unlikely, it's definitely possible.

I myself have never dared to apply the Martingale approach to my forex trading. It's that exponential factor that stops me cold. Starting with just 1 lot and doubling your lot size with each loss, it'll take you just 8 successive losses to be trading 128 lots. And sure, theoretically and statistically you'll eventually win out. But you may not have the money to get there and back - or as Investopedia succinctly puts it, "this is assuming the gambler has an unlimited supply of money to bet with."

All those caveats aside, I've always been curious to see the Martingale in action. And since I've been enjoying a few days in lovely, albeit blisteringly hot, Las Vegas, I couldn't resist trying it out at the roulette wheel. I started off with $200 in $10 chips at a table with a minimum bet size of $10. That's steeper than I'm usually comfortable with, but that was my only option at the time, so I took it (though I found $5 minimum tables later). Now, if I were you my first observation would be that $200 isn't enough of a stake. And I would have to agree with you. But it's all I could stomach for this experiment - so already, we see how psychological barriers start working against the Martingale system. If I'd been a truly gutsy bettor, I would've started with $1000 and the willingness to lose every cent of it. But I'm not. So, there I was with $200 in $5 chips.

I confined myself entirely to roulette bets that paid $10 for $10: even/odd and red/black. Which sounds like 50/50 odds, but if you've ever seen a roulette table you'll realize it's not: there are a couple green slots numbered with 00s that worsen the odds slightly. But over time and dozens of bets, "slightly" adds up to "a lot." Yet another reason to remind yourself that all those gigantic Vegas hotels weren't built by winning streaks.

As luck would have it, I started off with a fine winning streak, and was soon up $80. Though I knew it didn't really make a difference and was just a sort of superstition (though a harmless variety), I'd often bet on red after a run of blacks, or even after a run of odds. I also suspect I favored red and even in my bets, just because I liked them better.

After my nice run of wins, I lost a bet, and doubled my bet to $20. I lost that one too, and doubled to $40. And that time I won, taking in $40, recouping my $30 in losses and adding another $10 in profit to the pile. So far, so good! And in fact, that's the way it went for most of the rest of that Martingale trial. At one point, I'd even doubled my stake to $400. "This works, this really works!" I marvelled.

And then I started to lose. Very quickly, I lost $100, and by that time I was hungry and looking for an excuse to leave, so I decided to bail out with my remaining $100 in profits and try again later. I should also mention some incidental costs I incurred along the way, roughly correlating to the spread in forex: $10 in tips to the roulette dealers, and $5 in tips to the cocktail waitress who brought me margaritas. (If only the spread tasted so good!) Overall I was very pleased with how things were going, and enjoyed dinner immensely.

Now in theory, when I returned to the roulette table I should have picked up exactly where I left off, and doubled up after my last loss as if I'd never left the table. That would be following Martingale very strictly. But of course I didn't. What do you think I am, disciplined? Instead, I started from scratch, but with $5 bets at a table with a lower minimum. And again, I started off with a nice winning streak, and found myself up $60 with my well-chosen red/black, odd/even bets. And then things turned ugly. It's impossible to describe the sheer visceral discomfort of a really nasty losing streak, so I won't. I'll just stick to the numbers: 7 successive losses, which required me to double my bet to $320. $320! And what if I lost that bet? I'd be facing a $640 bet. And after that...well, I didn't want to think any further out than that. And, as it turned out, I didn't want to bet that $320, either. It would've required me to dig further into my wallet, throwing more bills on the table for chips, and the prospect of that made me queasy. Psychology had kicked in again, and the simple thought of emptying my wallet to make the required bet - and if that failed, heading to the ATM machine for even more - was almost intolerable. So I did what all bad gamblers and traders do when faced with painful losses: I abandoned my strategy. I just shoved all the remaining chips I had, about $100 worth, onto red and hoped it would somehow all work out. It didn't. The ball landed on black, and I got up and walked away. All my gains were wiped out and I was down to around $100 from my original $200 stake. And that's how things currently stand.

Right now I'm debating whether to head to an ATM and return to the roulette table with a new, larger Martingale fund and a truly disciplined approach that'll really make the system work this time. But you know, somehow I don't think that'll happen. I've learned enough about myself from this Martingale experience to know that when things get ugly, I'm liable to bail out and abandon the only strategy with the potential to work. Just as importantly, I know that I don't have unlimited funds, and few strategies can test the limits of your funds more quickly than the Martingale system. So I think I'll consider this Martingale experiment complete, and go blow my money on something I know I'll enjoy: the Shark Reef. I'm sure I can learn just as much about trading strategies by watching a tank full of sharks, and at a cost of a mere $15.95.

Now, turning our attention back to forex, I've neglected to mention another factor that could dramatically skew those Martingale odds in your favor. It's pretty obvious and you've probably guessed it by now: a winning trading system. If you're an experienced trader and already have a strategy that produces consistent profits, using Martingale principles is potentially a lot less risky, since your strategy boosts your odds of profitability from the get-go. After all, forex isn't like a roulette wheel for those who understand its inner workings. Let's say you trade on news events, and you get a news trade wrong because of a whipsaw in the price, or a sudden reversal, or a stop-loss in the wrong place. Even after this loss, you know that over time you get most news trades right. Since you have high confidence in your system's performance over time, maybe next time you'll decide to double your trade size. I'm not recommending it, but I will say this: if I ever venture into Martingale trading with forex, it will only be in conjunction with a tested trading strategy in which I already have a high degree of confidence.

You may also want to check out the anti-Martingale strategy, which increases bets/trades during winning streaks, instead of losing streaks. Haven't tried it, don't know as much about it, but maybe it works. If it does, please come back and post comments on your anti-Martingale experience!

By the way, if you're planning a trip to Las Vegas, I'd highly recommend the Mandalay Bay resort. Their 11-acre beach is a fine place to get some sun and forget about an expensive Martingale experiment.

And now, I'm off to visit their shark tank. Most posts to come, if I still have all my fingers.