Recently, some traders started advertising martingale money management to the binary options community, and some auto traders for binary options started using martingale money management systems. Therefore, it is important to understand the difference between a conventional and a Martingale money management system.
What are the Martingale Money Management Systems?
The logic behind a conventional money management is simple: Every trading strategy will eventually cause a number of losing trades in a row. To survive such a losing streak, a trader needs to limit his investment per trade.
Therefore, with a conventional money management system, a trader always invests a small, fixed percentage of his total capital. If a trader has a total capital of $1,000 and invest five percent of his total capital per trade, for example, he would invest $50 for each trade. As his bankroll increases, he increases his investment. Should he bankroll decrease, he would decrease his investment.
With a Martingale money management system, on the other hand, a trader would do the exact opposite: He would increase his investment after a loss. The logic behind a Martingale money management system is that if you have lost money, you have to invest more to win the lost money back.
The simplest version of a Martingale money management system is a well known example from roulette: A bets on either red or black. If he loses, he doubles his investment. He repeats this process, until he eventually wins a round. Ideally, this strategy will always win him the amount he first invested.
Does Martingale Money Management work with binary options?
Throughout history, many people have used Martingale money management systems in all sorts of investments. They all encounter the same two problems:
1) Limited capital
The most obvious problem of a Martingale money management system is the limited capital of the investor. At some point, increasing the invested capital simply becomes impossible because investor does not have enough money left.
Of course, this requires a relatively long losing streak. If you plan to earn money with binary options, however, you will have to invest for a long enough amount of time that such a losing streak will certainly occur at some point.
Since every round of Martingale investing prior to your losing streak can at best generate a return of your initial investment, but a losing streak will cost you hundreds of times your initial investment, such a losing streak will wipe out all prior gains you made using a Martingale money management system.
2) Unfair odds
A Martingale money management system implies that, with every turn, you have an equal chance of winning or losing the same amount of money. In reality, though, this is almost never the case. With high / low options, for example, you will receive a payout of at best 75 percent your investment. If you lose a trade, however, you will lose 100 percent of your investment.
This means, after you lose your first trade, you have lost one investment (1 I). With the Martingale money management systems, you will invest twice the amount on your second trade (2 I). Even if you win this trade, you will only win 75 percent of your investment for this trade, which is only 1.5 times your original investment (2 I x 0.75 = 1.5 I). This shows the dilemma of the martingale money management system: Your odds are constantly getting worse.
If you lose your second and your third trade, you will invest eight times your initial investment with your fourth trade. By this time you have invested 1 I (first trade) + 2 I (second trade) + 4 I (third trade) = 7 I. Your investment of 8 I on the fourth trade, however, can only win you 8 I x 0.75 = 6 I. That means, even if you win your fourth trade, you will lose the amount of your initial investment. Since 75 percent is a relatively high estimate for a payout with high / low options, your odds in real life trading are even worse.
The same math applies to any kind of binary option. While touch options offer a higher payout, your binary options broker will calculate the payout always in a way that makes using a martingale money management system unprofitable.
In conclusion, the Martingale money management systems will work perfectly, at first. Sooner or later, however, you will encounter the severe problems that come with a Martingale money management system. Combined with binary options, a martingale money management system will certainly fail. If your auto trading system offers a Martingale money management, make sure to deselect it. If you are trading manually, do not use a Martingale money management system either.