Martingale in Trading: The Averaging Strategy You Need to Understand

Martingale is one of the most discussed strategies in financial markets, originating from casinos. Its essence is simple: with each unsuccessful trade, the trader increases the size of the next order until losses are recovered and a profit is made. It sounds logical, but behind this simplicity lies a complex psychology of risk and capital management that requires a clear understanding.

The essence of the Martingale strategy and its origin

The concept of Martingale originated in the 18th century and was initially used in gambling. Its principle is to double the bet after each loss to recover all losses and gain a small profit upon a win. Later, traders adapted this idea to financial markets, modifying it slightly: instead of doubling, they use percentage increases of orders.

In the market environment, Martingale works through an averaging mechanism. When the asset price drops, the trader opens a new position with a larger amount. This reduces the average entry price, allowing even a small price rebound to generate profit across the entire set of orders.

How Martingale is applied in practice

Suppose you bought cryptocurrency for $10 at a price of $1 per unit. If the price drops to $0.95, you open a second order for $12. Then, with a further decline to $0.90, a third order of $14.40, and so on. Each new order is larger than the previous one, so your average entry price gradually decreases.

In practice, this system looks attractive: even a 2-3% price rebound can close all positions in profit. However, it only works under certain market conditions.

Risk analysis: why Martingale is dangerous

The main danger of Martingale is the exponential growth of required capital. If you start with $10 and increase each order by 20%, after five unsuccessful attempts, you’ll need $74.42. With a 50% increase, this amount jumps to $131 — almost twice as much.

An even more critical situation occurs when the market enters a prolonged downtrend. If the price falls without rebounds for several days, your capital may run out before a reversal occurs. At that point, you won’t be able to open the next order, and all previous losses will remain unrecovered.

The psychological factor should not be ignored either. Constantly increasing stakes creates stress, especially when you have to choose between opening a risky order or admitting a loss.

Order size calculation: practical formulas

The calculation of Martingale is based on simple math. The formula for each subsequent order:

Next order size = Previous order size × (1 + Percentage / 100)

For example, with a 20% increase and a starting order of $10:

• Order 1: $10
• Order 2: $10 × 1.2 = $12
• Order 3: $12 × 1.2 = $14.40
• Order 4: $14.40 × 1.2 = $17.28
• Order 5: $17.28 × 1.2 = $20.74

Total sum: $74.42

When choosing the increase percentage, keep in mind:

• 10% increase: slow growth, requires ~$61 over 5 orders
• 20% increase: moderate pace, ~$74
• 30% increase: faster growth, ~$90
• 50% increase: exponential growth, ~$131

When is it safe to use Martingale

If you decide to apply Martingale, follow strict risk management rules:

1. Limit the percentage increase: beginners are recommended to use 10-15% instead of dangerous 50%
2. Pre-calculate your series: know in advance how many orders you can open with your deposit
3. Keep reserve capital: do not use your entire balance on the first order
4. Monitor the trend: during a strong downtrend, it’s better not to use averaging
5. Set a stop-loss: determine in advance at what loss level you will close the series

Martingale is not a universal solution but a tool that requires discipline and full understanding of risks. It can be useful during short-term volatility but is extremely dangerous during trend movements.

Remember: no mathematical system guarantees profit. Trade consciously, manage risks, and do not let emotions influence your decisions.