Martingale is a popular betting strategy and is often used in prediction markets. A martingale is one of many betting strategies that originated from and were popular in 18th century France. The simplest of these strategies, all intended for gambling and gaming, was designed for a zero-sum game, that is, a game in which each side bets the exact amount and wins and losses are absolute. If I win, I win all; if you win, you win all.
The basic strategy has the gambler double his bet after every loss so that the first win would recover all previous losses plus win a profit equal to the original stake. In today’s world, the martingale strategy is most often applied to roulette as the probability of hitting either red or black is close to 50%.
The idea behind the martingale is simple: Double your previous loss until you eventually win, resulting in profit no matter what, as long as you are capable of going the distance. The only limiting factor is the size of your account; so long as you can make the next trade, you have a 50/50 chance of making all your money back.
Martingale removes the need to understand the market, technical analysis, and trading because the only thing that matters is the outcome of the following trade—all you have to do is make a trade and then double it if you lose.
Martingale is nearly a sure thing as your chances of producing a win grow with each consecutive trade, assuming, of course, you have an unlimited amount of time and a bankroll big enough to make whatever the next trade needs to be without going bankrupt. The danger lies within those assumptions.
To some, the martingale system seems pretty fail-safe, especially for newbies, but that is a popular misconception. If misused, it can quickly compound one’s losses to the point of catastrophic failure. The best thing to do is to use a sound money management technique like the Percent Rule to ensure that no single trade is so big it wipes you out. Save Martingale for having fun at the casino.
Why Martingale is not a good idea for prediction markets
Now with digital options, there are some things you have to take into consideration.
Number 1, you must be aware of the payout percentages because binary trading is a minus-sum game. You never win as much as you bet. Because they are less than 100%, you must increase your stake with that in mind, so you cover your previous loss and gain a profit equal to the initial trade. Otherwise, you will end up losing no matter what happens.
If you place a trade for $100 and lose it, then make a trade for $200 and win 85%; you only get back $370, covering your cost($100 +$200) but only winning 70% of your first trade.
If you went to a third trade, a $400 trade, you would return $740 but only profit $40 or 40% of the initial trade.
If you took it to a 4th trade, only doubling the trade size, the profit shrinks again and will turn into a net loss on the 5th trade.
The real risk here is that you have to increase your stake by more than 100% with each trade to ensure that you do not end up losing. This means that your potential losses grow exponentially with each trade. The first trade is 100%, then the second is 100% +115%, then the third is 215% + 250%, then the fourth is 465% + 500% so that your first trade is X amount of dollars, and your fourth is nearly 10X dollars and growing with each trade until your account can’t handle it anymore and you are wiped out of the market. In the end, Martingale is not trading to win; it’s trading not to lose.