One of gambling strategies, Martingale has been used in France since the 18th century. Does it apply to the binary options market?
Martingale’s principle is very simple: double the bet after every loss. It has been used in games that rely on being 50% effective, such as “heads or tails”.
Let’s say John invested $1 and wants to bet on heads regularly. It’s tails. His next bet is $2. If it’s tails again, then his next bet is $4. If it’s heads, he’s lost $3 (1+2) and his net profit is $4. Thanks to this strategy John gained $1. If he wins, he goes back to his original bet. But what happens when he only has $7 and he was wrong 3 times in a row? There’s only one answer: he’s a bankrupt. This is why using martingale not only requires significant capital, but also high stakes limit. Still, we risk losing the entire capital (a losing streak is always possible) and we do not earn much at the same time; you’re very likely to win small amounts of money and there’s a slight risk of losing significant capital.
Martingale has also been used in the present-day gambling, e.g. in roulette, bookmaking or Forex. There are also those who use its principles in binary options. Still, martingale’s popularity is a product of its simplicity not effectiveness. It may seem a very sensible strategy that ensures minimizing losses, but if it’s that effective, how come we don’t triple the bet every time we lose?
The table below shows why following the strategy may be extremely risky, especially in the long run:
|Doubled games||Stake ($)||Chances of losing the next bet||The cost of winning ($)||The amount won ($)||Profit ($)|
The chances of losing 9 times in a row are 0.1%, but – at the same time – when somebody follows the strategy for 1000 bets, chances that they will enter a losing streak at least once are extremely high and such a streak may cause a terrible loss.
Binary options do not offer doubling the stakes. Profits range from 70 to 80% of the stake, so following this strategy in its most typical version will not help us make a profit– it will cost us the minimal loss, which is why to make use of this strategy we need to go even higher and – sometimes – triple the stake.
Let’s go with an optimistic scenario and assume that our options make 80% profit. This means that our stake should be increased by more than 120%. Since brokers have different minimum and maximum settings, the range of martingale usage differs. For instance, if a broker offers the minimum of $10 and the maximum of $10000, then after 8 losses we won’t be able to go higher and it’s over for our martingale strategy. What’s more, as we risk more than $5000 to earn no more than $10, it doesn’t seem worth the risk.
If you really want to go with martingale, make sure that its effectiveness is about 70%. Also, go through your past strategies and check how long your losing streak was. Still, remember that your strategy may fail even 10 times in a row, because every strategy may just have a bad day and history does not always repeat itself. It’s best to wait it out than go with systems that cause your account to be in the red. What’s more, betting low in the beginning helps since you may just find out that you don’t have enough money to go with this strategy.