Understand and Respect the Martingale!
Binary options brokers make sure that they have a mathematical edge because that is their business, if you start to look at binary options trading as a business also then you will need to do the same. So the real question is; how can you get your own mathematical edge? Compounding is one way and what you are about to learn now is another, most people will tell you that any martingale approach is gambling. In fact, lets be realistic, for most people it is gambling and the next question is are you ‘most people’?
Due to the fact that most people won’t understand what is about to follow we are going to have to just call it gambling, many will and they are entitled to do so. The reality of life is that nothing is guaranteed and everything is gambling to some extent anyway. If for example you get a job and commit your life to company X, you are gambling on the fact that the company X will not shut down and leave you unemployed, or let you go because they are down sizing. That example is an extremely low risk form of gambling, but gambling nonetheless. Low risk = low rewards, high risk = high rewards!
Since there is no trading system on earth that will win 100% of the time, loss must be calculated in to any profitable trading plan. If you do not yet have a trading method with a high win rate and few consecutive losses then please visit the Forex Basics and Trading Strategies sections of this website. After that you can grab a Free Membership here so you can watch the free video course and expand your knowledge further. What is explained in detail throughout those sections and that video course will be taken to new speeds in the Binary Options Strategy lessons that follow.
The Low Risk Martingale in Action
A martingale approach has been around a very long time and you can use it intelligently, or you can use it to gamble. What we are going to do here is to use it intelligently and only to the extent of our means. One of the first things you need to figure out is how many trades you usually take per day on average. If you are able to sit down for a few hours per day for example, you will need to judge how many trades you are getting on average for those few hours. If you generally keep your eye on the charts all day then you need an average trades per day for that. Just like the previous lesson your best friend here is experience with your trading method and some trading history to review.
Now you need to think about how many winning trades it would take to erase a loss of your maximum martingale depth. A smart and not too deep place to start with this is a 2 level deep martingale, which means you would need to lose 3 trades in a row in order to consider the day a loss. The following table shows you the numbers based on an initial trade of some common sizes and we will use 70% payouts for these examples to keep it extreme.
|70% Return||$10 Start||$25 Start||$50 Start|
|Losses to Lose||3||3||3|
Before you proceed with a 2 level deep martingale strategy you will need to be sure that losing 3 trades in a row with your trading method is not very common. It doesn’t matter if it happens occasionally, it just matters that it doesn’t happen that often. As you can see in the above table it would require 14 wins to erase a 2 level martingale full loss, with an 80% payout the required wins drops to just 11, with an 85% payout it drops to 10. The higher percentage payouts you can find the less wins you will need and the easier your job will be. Visit our Regulated Binary Options Brokers page to discover up to 100% returns and make this even easier.
What you need to do now is consider the above information and create for yourself a session, or daily, goal. Every time you sit down you will either lose 3 in a row and then walk away, or you will win 14 trades (or 10 if you are getting 85% payouts, or just 7 on 100% payouts) and it doesn’t matter if they are in a row or not. Let’s say you are at 12 wins of 14 required and you just need 2 more, the following would get you there and complete your session: loss, loss, win, loss, win. This is the power of the martingale but it is very important that you have a solid proven trading plan to follow before you consider it.
It is always best to stay as realistic as you can and not assume that you will win every session. The following table helps you understand why you don’t have to win every session and what your requirements are to stay profitable.
|0 Session Loss||$475||$1170||$2340|
|1 Session Loss||$285||$702||$1404|
|2 Session Loss||$95||$234||$468|
|3 Session Loss||-$95||-$234||-$468|
|4 Session Loss||-$285||-$702||-$1404|
|5 Session Loss||-$475||-$1170||-$2340|
The numbers are clear and obviously you will prefer not to lose any session but you could lose 1 of 5 and still be doing quite well. A worse case scenario for you should be the losing of 2 sessions per 5 which still leaves you with some profit. After that you start heading to negative territory which probably means your trading strategy, or your ability to execute it, is not yet up to speed and you need to get back to studying and practicing for a while longer.
Let’s quickly run some more numbers based on the same concept and using the worst case scenario 70% payouts again.
|70% Return||$20 Start||$30 Start||$40 Start|
|Losses to Lose||3||3||3|
Based on the above table being your session target, let’s see how that plays across 5 sessions.
|0 Session Loss||$940||$1405||$1865|
|1 Session Loss||$564||$843||$1119|
|2 Session Loss||$188||$281||$373|
|3 Session Loss||-$188||-$281||-$373|
|4 Session Loss||-$564||-$843||-$1119|
|5 Session Loss||-$940||-$1405||-$1865|
With a 70% payout you need 14 winning trades to equate to a daily win, or 3 losses in a row to equate to a daily loss. With an 85% payout your wins needed per day to be a win is reduced to just 10, your daily loss remains the same though at 3 in a row. Those are the numbers and these days there is more and more competition in the Binary Options Broker world and higher returns are being provided than before. 70% really is the low end of what you will have to deal with and what you will find.
The Binary Options Martingale Worksheet
Here is a Binary Options Martingale Worksheet for you to use. It is an Excel file and all you have to do is enter values in to the top 3 black cells, the rest will be done for you. (click the image to download)
The Martingale Conclusion
If you have the correct skills you will find it hard to lose 3 in a row. Understanding your own daily or session capabilities will help you decide if this is even for you. Just remember that martingale trading also brings extra psychological issues along with it, if you are not confident in what you are doing then make sure you use a demo accounts to build some. Respect the martingale and spend the time to figure out if you should use it now or leave it to be revisited later on once you have more experience / personal results to study.