What is martingale in forex trading

This approach states that as the account balance of the trading account decreases, the size of the trade should increase. This is a popular MM technique between gamblers. The basic principle of this approach is that as the account suffers losses, its ability to recover increases.

Take for instance a coin flip. After three consecutive tails, there is a good possibility that the next outcome will be heads (although each outcome is statistically independent from each other). A gambler then would bet $100 on heads for the next outcome. If it comes out tails, then the next bet would be $200 for heads again. And the gambler continues to double the bet size until the outcome is heads.

One of the main drawbacks of this approach is that it does not consider that each try is totally independent from each other. In other words, every try has a 50% probability to come out heads, regardless of how many tails or heads came out before.

Another drawback (applies directly to traders) is that money is not infinite. Over a 100 trials in a coin flip, there is a slim probability to have a row of 11 consecutive tails. If the gambler were to bet going for heads from the 3rd trial on doubling each try, the last bet would be $25,600 (starting at $100).

It would not be long before our money, and our nerve ran out.

[Table 1]

The same goes for the trading environment. Imagine a trader that has an account of $100,000. He would start risking $1,000 on his first trade and doubling up on each following trade.

[Table 2]

After the sixth consecutive loss, his trading balance would be at $37,000 and would need to risk $64,000 on his or her next trade. To do this, additional funds are required.