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A martingale is any of a class of betting strategies that originated from and were popular in 18th century France. The simplest of these strategies was designed for a game in which the gambler wins the stake if a coin comes up heads and loses it if the coin comes up tails. The strategy had the gambler double the bet after every loss, so that the first win would recover all previous losses plus win a profit equal to the original stake.

It is a distinct possibility. Martingale's 'stick to your guns' approach might work in situations with a high probability of reversion to the mean. But it is extremely risky in a trending market.

How does Martingale trading work?

The theory behind a Martingale strategy is pretty simple. It is a negative progression system that involves increasing your position size following a loss. Specifically, it involves doubling up your trading size when you lose. The classic scenario for a Martingale progression is trying to trade an outcome where there is a 50% probability of it occurring. Such a scenario has zero expectation.

You would expect to make nothing and lose nothing in the long run. For this kind of 50/50 proposition, there's two schools of thought about how to size your trade size. Martingale strategy is about doubling your trade size when you lose. The theory is that when you do win, you will regain what you have lost.

Consider a trade that has only two outcomes, with both having equal chance of occurring. Let's call these outcome A and outcome B.

Let's suppose that you decide to trade a fixed sum of $5, hoping that outcome A will occur, but then outcome B occurs instead, and your trade loses. For the next trade, you increase your size to $10, once again hoping for outcome A. It's B that occurs, and you subsequently make a loss of $10. Once again, you double up and now trade $20 - needing outcome A to gain a profit. You keep doing this until eventually your required outcome occurs.

Application of Martingale strategy

You may think that the long string of