We are not advocating Martingale strategies. But rather, we respect the Martingale concept and believe it has its place in a trader’s portfolio. The following tips seek to reduce the overall risk and increase the overall success for Martingale traders.
1. Start small, stay small
Start with a small lot size, and continue to keep the initial position size as small as possible. The smallest trade size permissible on the MT4 platform is 0.01 lot. This allows the Martingale trade management to take effect over a number of trades. Many traders see their expert advisors generating a high return and quickly increase the position size, or the % risk; this quickly compounds the risk of trading system failure. Be realistic in generating returns in a sustainable fashion, and not take on excessive risk for unrealistically enormous quick returns.
2. Trade sound strategies with higher than 50% win ratio
Martingale is a position and money management tool; it should not determine trade entries and exits on a standalone basis. The higher the win ratio of selected strategies, the lower the chance of losing trades. The lower the chance of losing trades, the lower the probability of a string of losses – the higher your chance of recovery from losses.
3. Spread your eggs
Remember that market extremes can break any trading model. While this may be unlikely, diversification can minimize the impact of specific event risk. Traders can diversify using different trading systems, for example you can include systems which trade breakouts, trend following, mean reversion and price action, so your portfolio is more “all weather”. Next, you can also diversify using timeframes. For example, you can set your forex MT4 EA to run on 1minute, 5minute and 1hour. Lastly, you can diversify by running the expert advisor on different currency pairs.
4. Watch your margin
Many traders overdo their diversification by adding on too many active charts, timeframes and forex robots. When you have too many forex trades open at any one time, and a number of these trades start to move against you, there can be a scenario whereby your account does not have sufficient margin for further drawdowns on existing positions, or is unable to execute additional new trades. This is something you want to avoid in a Martingale strategy because every trade is important. Observe that your margin does not approach dangerously near to the maximum margin allowable to you.
5. Consider a Stop Loss
You may implement a drawdown amount which closes all trades, thus keeping your account alive in adverse conditions. For instance, some traders apply a 50% drawdown stop trading rule – once the equity balance is down 50%, it indicates a trading environment out of the ordinary and all positions are closed. The trader can then choose to resume when the market environment stabilizes again.
6. Prepare for worst case scenario
Even though in the example from our previous article the risk of 14 losing trades in a row is one in a million, we want to be prepared for that event as well, where the trading account goes bust. This is best managed by scooping out profits when a % return is made. For example, if you are running $10,000 on a Martingale expert advisor, and the account balance reaches $15,000, withdraw the $5,000 and start again at $10,000. In the event the account goes bust, your maximum loss is $10,000. But you would have ideally scooped out enough over time pay for such an event.
7. Be responsible for your trading
Lastly, it is a good habit to observe your trading history performance, observing the drawdown percentage, win ratio, and lot size increments, because an active management of these factors can dramatically increase your odds for success in a Martingale system. For example, you might notice that your Martingale system trades better in the quieter Asian hours, or perhaps the win ratio can be improved trading only on 1 hour time frame. An active adjustment and rebalancing of your portfolio can improve your trading performance as you understand your system better. In an earlier article we discussed how a modified Martingale can be applied.
Written By: Streetpips.com
Streetpips.com scans books and websites for trading strategy ideas. We then select those which are programmable, code them, and share these with our members.