Is It Useful to Use Martingale Strategy in Binary Options Trading?
What is Martingale Strategy?
The Martingale strategy is usually used by casino gamblers. Some traders also use this strategy when they conduct other forms of investing. The idea behind the strategy is simple. A trader doubles the investment stake after a loss and aims at generating profit on the whole and covering past losses.
Let’s say a trader placed a trade with $100 and the payout rate for this trade is 100%. The prediction of the first trade was incorrect. Then, the trader placed a second trade with $200. Again, the prediction was incorrect. The trader would increase the investment amount to $400. Next, he would invest $800 if it was an incorrect prediction. A trader would continue to invest and increase the investment amount so as to generate profit. If the trader made a correct prediction in the second trade in which the investment amount was $200, he would get $400 back. In this case, by subtracting the first investment amount $100, the trader would make a $100 profit on the whole.
If the trader made an incorrect prediction in the second trade, he will have to double the investment amount and invest $400 in the third trade. A trader has to increase his investment after every loss, which could lead to large amounts of money. This is considered as the main disadvantage of the Martingale strategy.
The main advantage of the Martingale strategy is that a trader can always make a profit once he made a correct prediction. In binary options trading, a trader only needs to choose between two options and there is a 50% chance a trader can win. Since a trader can make a profit if he made a correct forecast, it is a very attractive form of investing to traders.
Is it an effective strategy that can be used in binary options trading?
Now, let’s consider whether Martingale strategy is an effective strategy that can be used in binary options trading.
Theoretically, by using the Martingale strategy, if a trader continues to trade, he can make a profit eventually once he made a correct forecast. However, this strategy is effective only when a trader has a large sum of money for investment, so it is not realistic. Compared with forex trading, binary options trading requires smaller amount of investment funds. Traders who choose to trade binary options originally prefer to invest with a limited budget.
In addition, many binary options brokers have imposed a limit on the maximum investment amount for a single trade. A trader cannot infinitely increase his investment amount. When you trade with a binary options broker and the upper limit has been set to a high level, you can increase your investment amount for a single trade. However, when you trade with a broker who has set the upper limit of the investment amount to a low level, if you continue to lose, you may not be able to increase your investment amount to the extent that you would like.
When you use the Martingale strategy in binary options trading, it is essential that you carry out risk management and set a limit to the number of trades, say, 3 trades or 5 trades. In the worst-case scenario, you could not get back your investment amount. Thus, it is also important for you to be prepared for the loss. For traders who prefer to trade with a small amount of money, the Martingale strategy is not very useful for them.
The Martingale strategy can be useful when a trader can get high rates of return on investments. However, it involves a lot of risks. This is because that a trader can only get back the amount of money that is equal to the initial investment.
It is not a winning strategy in binary options trading
It is not unusual to see Martingale strategy as a winning strategy. However, it is necessary to maintain a win-win relationship between brokers and traders, and in reality, there is no such thing as a winning strategy. It is worthwhile to consider how to use the Martingale strategy by taking into consideration of the probability of win and loss.
Below is the probability of win and loss in binary options trading.
The probability of losing 10 times in a row is 1/1024. That is to say, a trader places 1024 trades and there is a chance that he will lose 10 trades in a row. So, how much money does a trader need when he loses 10 trades in a row? Let’s assume that the initial investment amount is $10. The amount of money needed will be $5120. It will amount to a large sum if the trader lost 20 trades in a row. In such a trade that there is a 50% chance a trader can win, it is unlikely that the trader will lose 20 times in a row. However, it is not impossible.
In terms of probability theory, it is understandable that it will reach certain number of times. It is necessary to set a limit on the number of trades by taking into account the investment amount. It may be an effective tactic to use the Martingale strategy to trade with binary options brokers who has set the maximum investment amount to a high level.
It is necessary to make efforts to increase the winning percentage
You probably understand that the Martingale strategy is not effective in binary options trading. Now, I would like to talk about more important things. The Martingale strategy is one of the gambling strategies and there were a lot of failure cases.
For example, some traders attempt to recover the losses and they would trade with a larger amount of money than usual. Some traders would also unintentionally place trades with a large sum of money after losses. In the end, this is very much like the Martingale. It is difficult to get satisfactory results. If a trader cannot keep calm and place trades with large amounts of money, it will not generate good results.
A trader should not think about recovering the losses. Instead, he should accept the losses. It is also important for the trader to reduce the losses by increasing the winning percentage instead of by increasing the investment amounts. If a trader can increase the winning percentage, it is possible to recover the losses. In other words, a trader should not be simply to recover losses, he should find methods and use tactics to win in the trades. This is the shortcut to be a winner.