Today will review and compare some betting strategies commonly used in Forex trading as well. It’s important to note in the beginning that these strategies are used when there are two possible outcomes with equal probability of occurrence. Although this is not an absolute requirement, that is most often the case. For sake of simplicity we will also assume that your losses and profits are of equal amounts. Traders are often tempted to apply these techniques in their trading with variable success. Let’s go in detail and compare the numbers.
- Martingale.
This is one of the most common of all strategies and dates back to 18th century. It’s also quite simple and easy to learn. The basic idea is that you double your bet with every loss. For example, if you start with initial bet of $5 and subsequently lose, your next bet should be $10 and so on, doubling the amount after every loss. Eventually when the player wins, they will recover all lost money so far plus a little more. Then the process is restarted and next bet starts again at $5. The only problem is that after several consecutive losses the bet increases so much that the player might not have enough money to continue. For example, after 6 consecutive losses your bet will be $320. The system never fails if you have an infinite account balance but that is never the case. So sooner or later the law of large numbers states that the player will face such situation. Martingale is often used in expert advisors and traders are tempted by the quick profits made but eventually they go broke. - Modified Martingale.
One simple modification to the Martingale system can be used to provide slightly better performance in case of several consecutive losses. The idea is that player doesn’t double the bet after the first loss. So if the initial bet was $5 and a loss occurred, second bet is also $5. If a loss occurs again then the the process repeats the original Martingale strategy, doubling the bet after every loss. This can make a big difference. If we take the same example of 6 consecutive losses, the bet on the 7th trial will be $160 (compared to $320 with Martingale). When a winning bet occurs, the player is at break-even. So profit is made only when the first bet is a win. - D’Alembert System
D’Alembert method (also called the Pyramid Plan) is said to be much safer than the Martingale system. Although quite similar, the bet doesn’t increase geometrically. Rather after every loss the bet is increased with a constant amount. Let’s say that player will increase the bet with another $5 after every loss. Hence, after the first loss, the bet becomes $10, after the second loss – $15 and so on. After 6 consecutive losses the bet becomes $35. After every successful outcome the same constant amount is taken away. In our example, if the 7th trial is a win, for the next trial the bet will be $30. After a second win the bet is further reduced to $25. The purpose is to reach the original bet of $5. At this point the player makes a profit of $5. The danger of this system is that a very long streak of losses can drain your account, although the chances are not as high as with the Martingale. In addition the D’Alembert staking plan could require an infinite number of bets after a losing streak to return to the point where a profit is made. Contrary to the martingale strategies, this system will fail if the number of your losses is more than 50% of all bets/trades taken. - Fibonacci System
The Fibonacci system is similar to the D’Alembert strategy but it relies on the Fibonacci numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, … where each following number in the sequence is equal to the sum of the previous two. The logic of the system is on every loss to multiply our initial bet by the corresponding Fibonacci number in the sequence. Starting with initial bet of $5, if the outcome is a loss, second bet is also $5, third one – $10, fourth one – $15 and so on. After six consecutive losses the bet becomes $65. That’s much less compared to the Martingale systems and almost double compared to the D’Alembert system. After a win, we reduce the bet to the previous number in the Fibonacci sequence and this goes on until we get back to our initial stake. Here the advantage is that you can come out with a profit by losing more trades than you’ve won.
Comparison
In the table below we compare the the four strategies presented at equal conditions:
– win:loss probability: 50%:50%;
– win:loss ratio: 1:1.
| System Name | Starting Capital | Initial Stake | Max Consecutive Losses To Survive | Drawdown |
|---|---|---|---|---|
| Martingale System | $1000 | $10 | 6 | $630 |
| Modified Martingale System | $1000 | $10 | 7 | $640 |
| D’Alembert System | $1000 | $10 | 13 | $910 |
| Fibonacci System | $1000 | $10 | 9 | $880 |
Conclusion
The table above shows how quickly a $1000 account can be drained. It’s obvious that the Martingale systems are the most dangerous ones. A streak of just 6-7 unsuccessful trades and you will not be able to double again, having a $1000 account. And if you think 6-7 consecutive losses is not likely to happen, you’re wrong. You will definitely face that situation sooner or later. If you wonder which of these systems is best for trading on Forex, I would personally pick the Fibonacci system. It’s still quite risky but can survive a greater number of consecutive unsuccessful trades and doesn’t require success rate of at least 50% as the D’Alambert system.