On basis of small movements in the price of stocks in order to earn profit, the action of buying and selling stocks is called active trading. In active trading, technical analysts adopt several types of trading strategies. Some investors trade based on news while others analyzes prices of stock by applying technical indicators and some recognized trading strategies to earn fat profit. There are many trading strategies like First Hour Breakout strategy, Martingale Strategy, Anti martingale Strategy, Grid Strategy and Range trading strategy. With the help of this article, readers will understand more one of the complex trading strategies, known as Martingale strategy. The article is well explained with the help of examples.
A martingale is a kind of trading strategy, which was originated from France in 18th century. The gambler/trader tosses the coin in this strategy. According to the strategy, the trade is in his favor if a coin comes up heads and loses it if the coin comes up tails. The Martingale is one of the oldest trading systems as many investors use the martingale strategy universally. The concept is quite trouble-free and easy to implement by the traders and technical analysts. In this system, traders put their bet on one of the outside trades. The scheme is simple, which says that after every turn you lose, you have to double your amount. This continues and the traders keep doing this until they win. Now, the readers will get confuse. However, if you read it carefully, you will find that as soon as the trader will win for the first time, he will recover all his lost money in one single chance with the profit. The first win will recover all previous losses, and give you a profit equal to your original amount. At this point, you start all over again with your original trade, which you double again until your next win. Working of martingale strategy can be explained with the following example. You make a standard trade, say Rs10. Every time you win, you make the same trade for the next hand. However, if you lose, you double your trade for the next turn. When you eventually have a winning hand after a series of losing hands, your net win will be Rs10. In fact, every time you win a trade, you will be up another Rs10, in spite of past losses.
Here is an example explaining well martingale strategy practiced in stock market. You trade Rs10. You win, so you trade Rs10 again. Then you lose, so you trade Rs20. You lose again, now you trade Rs40. You lose again, and then you trade Rs 80. Again, if you lose then you trade Rs 160. In this hand if you win, you will earn Rs160. Only by doubling the lost amount, it is possible to come out ahead of the loop. On the other hand, in real life one cannot always double the amount.
Therefore, the Martingale Strategy is said to be risky and this is the reason why martingale is practiced only for short term investing. If you lose an adequate amount of times, you will break. You will not have sufficient money to make the next trade. As long as you play, the risk of losing the money gets high and higher.
Initially, the martingale strategy was only developed for games and betting but later the technical analysts modified this strategy and started implementing in stock trading.
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