Using Martingale Strategy to trade Binary Options
Today, we’ll learn more about the famous Martingale strategy and analyze its pros and cons to Binary Options trading. Many people don’t really hear of the word “Martingale” in trading because it is not really well-known in the trading/ investing field. Martingale rather has its name in the betting and gambling fields, mostly Blackjack and Roulette where the chance of winning are almost random. The question here is, whether Martingale strategy could apply its utility and yield a positive expectancy for financial speculator? In this article, we’ll talk about Martingale strategy and its application to Binary Option trading and how to use Martingale strategy to trade Binary Options successfully.
The Martingale Strategy
Martingale strategy are basically a strategy where you double your trading volume after every bets in the hope that it will cover the previous losing streaks and yield a small profit. Martingale strategy is prevalent in the betting world because the outcome is roughly 50% that you’ll be ending in profit, so, eventually you’ll get a win and come out a winner after losses. You just keep on doubling until you win it, that’s basically it. However, because trading is not random like tossing a coin, so applying Martingale strategy needs to be expanded a little bit so that our edge is higher than the mare 50%. A very good example for the thought of using Martingale strategy in Binary Options is actually the underlying asset itself, for example, a currency pair, we’ll need to determine which one is outperform the other to make trading decision. Whenever there’s a 50% of thing, people often refer to Martingale as one of the strategy.
Refer to this picture above, you’ll easily understand how to use Martingale in betting or trading. For instance, you expect the Eur/Usd to rally in the next 10 minutes, you place a call, for example, you invest $10, it unfortunately results in a loss. This time, you expect Gold to drop, you place a put, however, this time, you’ll double your investment, it means you’ll invest $20 this time. Unfortunately, Gold continues to rally and your trade result in another loss again. Until now you’ve lost two trade in a row. A few minutes later, another opportunity appears depends on your trading method, you forecast that Crude Oil is rally enough, it’s meant to have a short retracement, you place a put for that anticipation. This time, you’ll double your previous investment, you’ll have to investment $40. The market, this time, does exactly as what you were expecting, you win $40 after price expired. So, your winner is $40, your losses are $30. You end the day with $10 profit. Therefore, if you believe that your trading ability won’t let you have too many losses in a row and you have a decent bankroll, then this strategy might be very sound for you!
Apply Martingale Strategy to Binary Options
Only a blind gambler would use the Martingale as a sole strategy to beat the market. If I want to use the Martingale strategy as my only strategy, I would rather choose Sports or Blackjack to invest because it’s way more entertaining than the complicated financial instruments. We should use the Martingale in conjunction with our other sound trading methods. For example, if you are a Price Action trader, you often predict the market in the right way but you keep on losing because you don’t have a sound money management method, then the Martingale strategy might be for you because it’s a fixed money management system in place; all you have to do is apply it accordingly.
Binary Options Traders Beware
While the Martingale system looks like a sound trading method in the paper because it seems to help you recover all your losses in only one trade, this strategy has its own flaw. In a bad day, you might have a very bad losing streak and the losses will accumulate extremely fast which you won’t be able to imagine until you experience it. In the table above, after only 5 trades, you already lost $310 after initially trade a volume of $10. It’s just accumulating when you are losing.
If you don’t have a deep pocket, you’ll get burn fast in a bad day. If you are mentally not stable (given you just starting out trading), you will be emotionally shaking because the losses is very big. Even if you have deep pocket, if you are emotionally not stable, you’ll suffer severe results when the trading psychology comes into play. For more on trading psychology, read our article Why Do Traders Fail.
On a good side is that you’ll have a slight edge that currencies will never devalue to the point that it reaches zero. It basically means that, at some point, the currency will get stronger than its previous self, so if you commit to the cause until the very end, you’ll come out a winner in theory. However, only if you could handle a very big losing trades after the long losing streak like previously mentioned. Another advantage for Binary Options traders who trade currency pair is that, like savings, the currency will yield interest over time. Therefore, many Binary Options trader buy the currency that carry a higher interest rate than others, to get the interest over the long term, while using the Martingale strategy to cover the losses.
In conclusion, Martingale could be a sound method if use properly but could be a devastating method if not use it blindly. Therefore, it’s advisable to always think thoroughly and remember to do trials and errors before applying any trading strategy.
Good Luck and Good Trading.