The Martingale and Anti-martingale Strategy

Understanding these two strategies is very important.

The Martingale Rule: increase your risk when losing.

This strategy is often used by gamblers. It claims that you should increase the size of your trades when losing. In gambling it would work like this: your original bet is $10. If you lose, bet again for $20; if you lose again, bet $40; if you lose again, bet $80 and so on.

This strategy assumes that after four or five losing trades, your chance to win has increased so you should add more money to recover your loss. In actuality, your odds would be the same in spite of your previous loss. If you have five losses in a row, your odds for sixth bet are still 50:50. This mistake is made by many novice traders. For example,if a trader started with a balance of $10,000 and after 4 losing trades ($1,000 each) his balance is $6000. The trader will think he has higher chances of winning the fifth trade and will increase the size of his position four times to recover his loss. If he loses, his balance will be $2,000. He will never recover from $2,000 to his starting balance of $10,000. Disciplined traders should not use such gambling methods unless they want to lose their money in a short period of time.

Anti-martingale Rule: increase your risk when winning and decrease your risk when losing.

Makes a lot of sense doesn't it! It means that the trader should adjust the size of his positions according to his new gains or losses. For example: Trader A starts with a balance of $10,000 and his standard trade size is $1,000. After six months his balance is $15,000. He should adjust his trade size to $1,500; Trader B starts with $10,000 and his standard trade size is $1,000. After six months his balance is $8,000. He should adjust his trade size to $800.