Over the years, investors have tried their luck with all sorts of investment tactics. One of the older ones dates back to 18th century France and proposes that you reduce every winning bet and increase losing positions. In this article, we’ll take a look at the Martingale system and everything it entails.
What is the Martingale System?
The basic premise of a Martingale trading strategy is that the market is always in balance, so you should never reduce a position even when it incurs significant losses. In fact, the concept tells us that you’re able to recover your losses by doubling down on the previous bet.
In practice, this would look something like this:
- You invest $100 in a stock and lose all your money. Instead of avoiding the stock, you now put 200 dollars into it and wait for the market to eventually start trending up.
- The martingale system also works when you’re winning. If you invest $100 and the stock increases in value by 100%, now being traded at $200, you should take out $100 from the position in anticipation of its price dropping.
While the Martingale strategy makes sense in theory, it can be rather nerve-wracking for traders. It proposes you continuously invest in losing assets, regardless of the market and company situation. In essence, it is a highly speculative method that relies on common sense and mathematics, while completely disregarding fundamental analysis.
In fact, the traders have even developed an anti-Martingale system to counter the original concept. According to it, market participants should use all their investments and double down on winning positions while closing losing ones.
Pros and Cons of Martingale Strategy
Pros
- The best thing about Martingale is that it allows you to quickly recuperate losses. This makes it invaluable in volatile markets.
- You don’t have to be a financial guru to use this tactic; just about anyone can understand the basic premise.
Cons
- The main reason why traders have stopped using this concept is because it’s highly risky. Doubling down on losing assets increases your exposure and takes common sense out of the equation.
- The strategy can affect your liquidity. Given that you continuously have to patch losses while taking away from winning positions, you’ll eventually become stranded for cash.
- Martingale will not work in many situations as it relies on reversals. It is especially risky during prolonged market downturns when many investors start pulling out their money from stocks.
- As mentioned, the tactic can be extremely strenuous for traders. The fact you’re consciously investing in assets that have shown low potential or have started dropping for real, financial reasons is why many traders have stopped using Martingale.
In this case, if you don’t have money to invest then you can still make money.
Final Verdict
If you’re a serious investor who wants to make a steady profit on financial markets, you should steer clear of Martingale’s strategy. While this tactic sounds cool in theory, it makes the investment process look like betting. In fact, it nullifies all your financial knowledge and understanding of marketing trends.