There is legends of an age-old strategy.
The strategy works like this:
First, find a guessing game with 1:1 odds. Place a $1 bet.
If you win, the game ends.
If you lose, place a $2 bet in the second round.
If you win the second round, the game ends.
If you lose, place a $4 bet in the third round, and so on and so forth.
If you win, the game ends.
If you lose, double the next bet until you win.
Theoretically, your winnings will always be $1 more than the amount of money you have lost.
This strategy is called the “Martingale”.
How to use the Martingale Strategy in trading?
Can this strategy be used in trading?
Yes, it can.
Suppose we believe that Stock A has the potential to rise.
We buy 100 shares at the current $55 and set $5 as the trading position interval.
A few days later, the stock price starts to fall.
With every $5 drop in price, we buy double the shares that we’ve bought earlier.
If the stock price drops to $35, we would have 3,100 shares.
At this point, the stock price begins to rebound.
If the stock price rises to $40, we sell all the shares.
Even though the stock price has dropped by 27% compared to when we first started buying the stock, we did not suffer any loss but achieved a profit of $2,500 instead (excluding trading costs).
What are the strengths and weaknesses of the Martingale Strategy?
We believe the strategy has the better potential in a ranging market because Martingale Strategy allows you to add positions gradually, which brings down the average cost of a falling stock, even you don’t buy at the bottom.
In addition, once the price rebounds slightly, you can immediately turn your portfolio from red to green and exit the market with profits.
On the other hand, the strategy's weakness is also very obvious, especially in trending markets.
When a stock is moving up, the Martingale Strategy may not give you a lot of returns because the overall holding is small.
And when a stock is moving down, the strategy requires you to double your position at each stage.
As a result, you have to invest heavily and expose yourself to the potential of huge losses.
Even if the stock price eventually rebounds, the profit you receive when you exit is not that high, so the overall risk-reward ratio is not very good.
How to construct the Martingale Strategy?
It’s available in moomoo’s Quant feature, where quantitative trading is made as easy as building with LEGO bricks.
Also, this feature is free for all moomoo users.
Open Quant, after completing getting-started tasks, we’ll offer 3 strategies for your reference, including Martingale Strategy.
All you need is to set the parameters, including the underlying asset, the position size, interval for each position, multiplication factor for each position, maximum number of position stacks, take profit percentage, and stop-loss percentage.
Then tap Backtest to run the strategy and see how it performs historically.
When everything is all set, the strategy is ready to be executed through your brokerage account.
What are the risks to watch out for when using the Martingale Strategy?
There are two main risks to watch out for when using the Martingale Strategy.
The first risk is the duration and cost of holding.
We recommend that you avoid using this strategy in the options or futures markets.
At the same time, make sure that you have no or little holding costs (e.g., financing interest, securities lending interest, time loss, and so on).
In addition, we must also be mindful of the potential risks caused by disruptions to the strategy as a result of power or mechanical failure.
Again, apart from Martingale Strategy, there’re other strategies available.
You can even construct your own trading strategy using Quant on moomoo!