Martingale is: how a risky strategy works and why traders lose money on it

Every trader has heard of martingale at some point. Many try to apply this tactic hoping to quickly recover losses. But few understand why this seemingly logical scheme often leads to losing the entire deposit. Let’s figure out how martingale actually works and why it’s so attractive yet dangerous at the same time.

Martingale is simple: where did this strategy come from

Martingale is a strategy that originated not in trading, but in casinos. Players devised a simple system: after each loss, double the bet. The logic seems solid — sooner or later, a win will come, covering all losses plus making a profit.

For example: you bet $1 on black and lose. You bet $2 and lose again. You bet $4 — and win. Total: you recovered $7 (losses) and made $1 profit. Sounds good, right?

Traders noticed this scheme and adapted it for financial markets. If an asset drops, you simply open a new order with a larger amount. The average entry price decreases, and even a small price increase can lead to profit.

How martingale is used in real trading practice

In trading, martingale is used for averaging down. Here’s a specific scenario:

You bought a coin for $1 for $10. The price drops to $0.95. Instead of closing the position at a loss, you open a new order for $12 (a 20% increase). The price drops further to $0.90. You add a third order for $14.4. And so on…

Result: your average entry price becomes lower with each new order. When the price even slightly bounces back up, all your positions close in profit simultaneously.

This works as long as there’s enough money in the deposit. The problem begins when the price continues falling without rebounds.

The danger of increasing orders: what happens to the deposit

Here lies the main trap of martingale. Let’s look at real numbers to see what happens to your deposit:

Suppose you have $100. Starting order is $10, increasing each subsequent order by 20%:

• Order 1: $10
• Order 2: $12
• Order 3: $14.4
• Order 4: $17.28
• Order 5: $20.74

Total for 5 orders: $74.42

After the fifth order, you have only $25.58 left in your deposit. If the price doesn’t reverse and keeps falling, you simply won’t have enough money for the sixth order. Positions will close at stop-loss or liquidation, and you’ll lose a significant part of your deposit.

Now imagine more aggressive percentages:

• At 10% increase over 5 orders: needs $61
• At 20% increase: needs $74
• At 30% increase: needs $90
• At 50% increase: needs $131

See the difference? At 50%, you need more deposit than you have. One bad day on the market — and it’s all over.

Advantages and critical disadvantages of martingale

Why traders still use this strategy:

• Quick recovery of losses in favorable scenarios
• No need to perfectly predict market reversals
• Psychologically satisfying to see the average price decrease

Why martingale leads to ruin:

• Insufficient funds in the deposit for a full series of orders
• Market can fall for days without a rebound (strong downtrend)
• Psychological pressure grows with each new order
• Commissions and slippage in real trading reduce effectiveness
• One series of failures can wipe out weeks of profit

Precise calculations: how to determine the size of the next order using a formula

If you decide to try martingale, know the exact calculation. It helps avoid mistakes:

Formula for each next order:

Next order size = Previous order size × (1 + Martingale %)

Example with 20% increase, starting at $10:

1. Order 1 = $10
2. Order 2 = $10 × 1.2 = $12
3. Order 3 = $12 × 1.2 = $14.4
4. Order 4 = $14.4 × 1.2 = $17.28
5. Order 5 = $17.28 × 1.2 = $20.74

Total sum = $10 + $12 + $14.4 + $17.28 + $20.74 = $74.42

Before trading, always calculate on paper or in Excel how many orders you can open with your deposit. If it’s fewer than 5–6 orders, martingale is too risky for you.

How a beginner can apply martingale correctly without losing the deposit

If you still want to try this strategy, here’s a safety checklist:

1. Use minimal percentage increases (10-20%)
The smaller the percentage, the longer your money lasts, and the higher the chance the price will reverse.

2. Pre-calculate the maximum number of orders
Calculate how many orders fit into your deposit using the formula. Be conservative — subtract 30% as a safety cushion.

3. Never start with a large amount
If your deposit is $1000, don’t open the first order for $200. Start with $50–100 to leave room for maneuver.

4. Use additional filters before martingale
Don’t average down in a strong downtrend. Watch volume, trend lines, support levels. If the asset falls without rebounds — it’s a sign that martingale isn’t the best choice.

5. Set a strict loss limit
Decide in advance at what loss you will close all positions and stop. Trader’s psychology is tricky, and it can convince you to continue at the worst moment.

Conclusions: why martingale is not magic

Martingale is not a strategy that guarantees profit. It’s an averaging tool that works only under certain market conditions and if you have enough money.

Historically, many experienced traders lost their deposits precisely on martingale. They underestimated the risk of prolonged price declines and overestimated their deposit size.

Main rule for beginners:

• Start with minimal percentages (10%)
• Never use your entire deposit on the first order
• Pre-calculate how many orders your deposit can support
• Have an exit plan if the price keeps falling
• Remember: emotions are your main enemy

Trade thoughtfully, control risks, and don’t let emotions dictate your actions. Good luck in trading, and always keep risk management in mind!