Martingale strategy and EAs

Martingale is a betting strategy used for a long time right from the 18th century. It is a strategy which is supposed to be used in those cases where the probability of success is 50% like in the toss of a coin. What they do is that when a person bets, he keeps on increasing his bet exponentially for every loss that he makes. This makes sure that even if he wins once, he would be able to recover all the losses plus the money which he had used for betting the last time.

I used to go around many forums a lot (i do it even now) and i read all trading systems with special interest just to understand the strategy behind it and try to imbibe the good points in them. I also see a lot of EAs nowadays and i find that most of the so-called successful ones are based on the martingale strategy. Believe me, if the martingale strategy comes off, its fantastic. It helps you recover all your current losing trades. Here is one example. I start off with 1 lot and for every 20 pips against me, i open another trade in the same direction but with double the number of lots. So if i buy one lot, say at 100, and the price goes to 80, i buy 2 more and if it goes to 60, i buy 4 more and so on.

We use this strategy cos even if the market recovers a bit, i would be able to recoup all my losses with the last biggest trade and if the market recovers a lot, i do make a huge amount of money. So what can go wrong in this?
Two things...First one, it assumes that you have infinite amount of money in your account. Lets say that the market goes against you for 200 pips, you would have to open more than 100 lots to work out this strategy. How many of us have that kind of money? If you start with this strategy, you need to stick with this strategy throughout till you get back your losses else you are in a big soup. You can follow this strategy till you have abt 20 trades open when the market goes off 100 pips against you and then after 100 pips, change your strategy to either stop it or say, change it to increase your lots exponentially every 30 pips. Nope...that cannot be done for this strategy to work.

Second, this strategy assumes that the probability of your success is 50% always. In the market, that probability of success is never 50%. I am not saying that it cannot be 50% or higher. You can make the probability greater than or equal to 50% by your knowledge, experience, study etc. but with none of the above and with just a blind strategy with no consideration of the price action, your probability of success is close to 0%.

The above strategy would seem to work during ranging markets with well spanned out and strong retracements but just as it can make you and help you come out of losing trades, it can wipe you out in next to no time. Everything in this market is like a knife which can cut both sides. Just as things can make something work great for you, things can make them equally worse for you. So watch out.

For those who use EAs based on this strategy, please be advised that it is very dangerous. But if you still insist on using them, make sure that you keep withdrawing your money as you as u make some so that you dont lose everything that you made at one shot when things start going against you.

Happy Trading!!!