I first saw the martingale strategy in the movie Focus starring Will Smith. It’s a simple strategy actually, when you think of it, and anyone can use it when trading binary options. The basic principle of the martingale strategy is to double up your stake whenever you lose a bet, but maintain the same stake on winning trades.
How the martingale strategy works
To see the martingale strategy in action, imagine someone playing a roulette. If you are not into gambling, you can look up roulette rules here for your further understanding. Now consider a gambler who places a bet for, say, $50 with the hope of a double return. If the bet went well and they won, then the next bet would also be for $50. On the other hand, if the gambler lost the bet, then the next bet would be for $100.
According to the martingale system, doubling up on losing bets ensures that when the gambler does win, the winnings will compensate for the losses.
Now consider if the gambler lost 3 successive bets, the first for $50, the second for $100 and the third for $200. They would be now $350 in the red, but by doubling the last losing bet of $200 to $400, then a win would compensate for all the losses and leave some profit on top.
This is the basic principle of the martingale strategy, and it is a popular gambling strategy, for which it was meant. Now, some binary options traders are using it in their trade, so let’s see how that might work.
How it can apply to binary options
Trading binary options is a bit like gambling, which is why they are also called all-or-nothing options. Which is why some binary options traders look at the martingale strategy as a way to trade. However, it is not a viable trading strategy for binary options even with best binary brokers or any other financial market for several reasons:
- The financial markets do not have fixed odds like the casinos. In a casino, every bet has fixed odds, and these odds will remain throughout the betting period. Therefore, the casinos offer a predictable result for every bet that is not affected by external factors. With the financial markets, a lot of other factors come into play that affect volatility, hence, you cannot predict how much the markets will move at any given time. This makes the martingale strategy unreliable for trading binary options
- Payout for binary options is less than 100%. When you’re gambling in a casino, for example, your winnings will be given to you in full without the casino deducting any charges. Binary options, on the other hand, have a maximum of around 90% payout, most of the time even lower. With a lower payout, using the martingale strategy with binary options will leave you with a loss even when you do win because you will be betting more than you’re earning
- It requires unlimited capital. The one major downside to the martingale strategy is that it requires the trader/gambler to have very deep pockets that can sustain a string of losses while still being able to afford a doubling of bet sizes. Very few people are able to sustain a string of losses, which makes the martingale strategy unsuitable for binary options.