Martingale for Binary Options

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Martingale

Martingale is a popular form of betting strategy and often used in binary options; read on to find out why you should not be using it.

The Martingale Method

A martingale is one of many in a class of 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 same 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 a simple one: 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.

What Martingale really does is remove the need to understand the market, technical analysis and trading because the only thing that matters is the outcome of the next trade. All you have to do be able to 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 bank roll 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 used incorrectly it can quickly compound ones 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 Binary Options

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 with each trade, to ensure that you do not end up losing, you have to increase you stake by more than 100%. 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 cant handle it any more and you are wiped out of the market. In the end, Martingale is not trading to win, its trading not to lose.

Martingale Strategy for Binary Options Trading

Origins of the Martingale Strategy

Usually more commonly associated with gambling, the Martingale Strategy is also successfully used as a betting strategy for binary options. Now you may have heard of the Martingale strategy without actually knowing what it is all about. So lets explore.

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The Martingale strategy was first created by Pierre Levy sometime in the 18th century, and was first used for successful predictions on gambling bets in France. The principle is very easy. The Martingale strategy is based on what is known as the doubling down strategy. According to Pierre Levy, it is possible to successfully recover any money that has been lost in previous bets by consistently setting up bets in the same direction, each time doubling the size of the investment. The thinking is that eventually, the increased payout from a successful trade down the road would cover for any losses that had been sustained earlier.

The strategy, which was first used in the gambling tables, has been adapted for use in the financial markets, as well as in binary options. Obviously, it is not a very good idea to just keep doubling bets continuously, or to keep doing this all the time. So a modification was made to this strategy for use in forex and binary options.

Review

Review

Martingale Strategy for Binary Options

The Martingale strategy for binary options is a trading strategy which aims to recover capital that has been lost in previous failed trades by consistently doubling the investment amount in subsequent trades. The thinking behind the strategy is that by increasing the amount invested in subsequent trades, it is possible to get an increased payout if the trade is successful, thus eliminating any previous losses that may have been sustained on the account.

How to Apply Martingale Successfully

To better understand how the Martingale strategy in binary options works, the table shown below has been drawn up to enable you get a hang of it. The trader starts with a capital of $2,000 and starts off with an investment amount of $100. We will also assume that the trader’s payout for a successful trade is 80% of invested amount, and that there is no loss return (any invested amount lost = 0% payout).

Trade Direction

Broker Early Expire Average Return Min Deposit Min Trade Rating More
95% $ 250 $ 1 ★★★★★
× 95% $ 250 $ 1 ★★★★★
× 85% $ 250 $ 1 ★★★★ Trade Outcome Invested Amount Profit/Loss Account Equity
PUT Win 100 80 2,080
CALL Lose 100 100 1,980
PUT Lose 200 200 1,780
CALL Win 500 400 2,100

The first trade in this example resulted in a win of $80, representing 80% payout for an initial investment of $100. Unfortunately for the trader, the next trade was a loss. Given the fact that a losing trade can wipe out a previous winning trade of the same level of investment with residual loss on the account capital, the trader’s account went below the starting capital. We can also see the sequence of loss continued with the next trade. Now down by $220, the trader decided to employ a Martingale strategy by doubling up on the previous investment. The resulting win ended up covering the losses sustained and still left the trader with $100 extra on the starting capital.

This is a demonstration of how the Martingale trading strategy works. However some points must be duly considered.

Important Considerations

  • Market conditions are not perfect, and there is indeed no guarantee that the doubled up trade will always end in profits. This element is what makes the Martingale strategy a very risky one.
  • To be able to execute the Martingale strategy, the reward to risk ratios must be carefully assessed to determine the safety of the strategy at the particular time.
  • Executing a Martingale strategy requires access to a large pool of capital. We can see that from our example that the strategy required the use of $900 in capital. If the doubled trade had ended as a loser, it would have led to the decimation of 40% of the account after only four trades. So the trader must be ready to deploy bank transfers to get as much deposit capital into the account as possible.
  • This strategy should be used on the more predictable trade types. Using the Martingale strategy on multiple options is not a good way to deploy the strategy. It is best to use the Martingale strategy on the Call/Put trades, as this is the most straightforward binary option to trade.

How to Use the Martingale Strategy in Binary Options

What is the best way to deploy the Martingale strategy in binary options?

  1. Only Use Predictable Financial Assets

It is important to trade the Martingale strategy with assets whose movements are more predictable. Assets that are prone to making wild swings in price movements are not suitable for Martingale-based trading.

  1. Combine the Martingale Strategy with Trend Line Trading

Trend lines are usually used to demarcate areas of support and resistance by connecting the price lows and price highs respectively. Support and resistance areas are important because they provide a sound technical basis for possible price reversals or even price breakouts. This puts an element of predictability into the trade and therefore gives the trader a clue as to when to “double up” the investment.

  1. Deploy Price Action to Your Benefit

Price action trading using candlesticks is a time-tested method of predicting price behavior. Candlesticks can give an indication of what the buyers and sellers are doing in a market. So by studying the candlestick patterns, you can tell when prices are about to move in a certain direction. This takes away the gambling component from the Martingale strategy and makes for more successful predictions.

  1. Trade During Times of Peak Market Activity

All financial markets have periods of peak activity. Use this information to your benefit. For instance, the forex market has two periods in the day when two trading zones have a time overlap. This is the peak of trading activity for currencies in the overlapping zones. The stock markets have trading hours and have periods of increased activity within those trading hours.

  1. Use Sound Money Management Techniques

In the execution of the Martingale strategy, it is important to ensure that sound money management techniques are used. The 3-5% rule in terms of how much exposure of capital can be accommodated in active trades must be followed. This means that the initial set of trades conducted on the account should be done with the minimum trade size, so as to allow for expansion of the trades when the need to double up arises.

  1. Ensure the Trading Account is Well Funded

One of the key money management principles requires that the trading account must be well funded. This is perhaps the only way to accommodate increased investment into active trades without putting the rest of the capital in great jeopardy. It is important to note that not all Martingale trades will pay off at the first instance. How do you survive in the market if the doubled investment ends in a loss? It is by having a good reserve of trading funds. If you do not have access to such a cash reserve, please leave the Martingale strategy to those who do.

Q: What is the Martingale Strategy?

Answer: It is a betting strategy. It comes originally from the world of gambling but can be used for binary trading too. The basis of this strategy is how much to raise each investment amount depending on whether you lose or win the last trade. The strategy states that you should double up your bet each time you lose the trade before. If you win you should keep the same amount that you have previously bet.

Q: How safe is the Martingale Strategy?

Answer: How long is a piece of string? It really depends on your success levels with the trades you are placing. For instance let’s assume you are having a bad role and you have had 5 losing trades in a row. You started by investing $100, on the second losing trade it goes up to $200, then on the third trade to $400, $800 and then finally by the fifth trade you will need to invest $1600. That’s a huge amount for one trade and it means you will need to have a huge amount of starting capital, as you will lose $3100 in just five trades. If you have a huge bank roll its worth considering as a betting strategy, however it goes against most traders’ capital management and risk management strategies.

7 Binary Options

Top Strategies In Binary Options Trading

Just as in any other form of trading, for one succeed in binary options trading, one should find a good approach and come up with the right strategy for trading as well as the management of the trader’s investments.

There are a variety of binary options trading strategies that have been developed with an aim of increasing the income obtained from binary options trading when these trading strategies are properly utilized.

In this article we are going to look at:

  1. Martingale and Anti-martingale Strategy
  2. Tunneling Strategy
  3. Precise Enter Strategy

There is also a short segment on volatility tools to enable binary options traders to understand the significance of volatility in market prices while using their trading strategies of choice.

Martingale & Anti-Martingale Strategy

The Martingale Strategy is a common binary trading strategy that is used by most binary options traders. It is where a binary options trader doubles his or her bet after losing the previous bet, with the hope of winning this time round. The doubling of the bet is done in the attempt of covering the previously lost bet. The most important thing that binary options traders should not forget when applying this strategy is that they should not only double the last bid but rather double the sum of all the previous bets that were lost as well.

For example, if a trader bought a binary option for $25, which is usually the minimum purchase option, and the option results in a loss, the next time the trader purchases an option for $50 and the forecast still turns out to be incorrect, the trader should go ahead and purchase $150 in the next option, and if it still results in a loss, the trader should invest $450. This strategy requires a lot of courage as well as patience.

However, if a trader buys stock options after doing a good analysis of the market, it becomes very easy to apply this strategy to reduce the risk. But for the beginners, they should only use this strategy if they very courageous and they have a tight budget.

Opposite to the Martingale strategy, there is another strategy called the anti-Martingale strategy. The anti-Martingale strategy involves increasing the investment only after a profitable option has been closed and reducing the subsequent investment if the previous option has made a loss.

Binary options traders should, however, keep in mind that the key to making profits is having a rational approach when trading: the trader should have a plan, and settle on the maximum amount that he or she is prepared to invest.

Precise Enter – binary options trading strategy

So that traders can effectively trade binary options, they often apply a strategy known as Precise Enter. This strategy suggests when it is the most suitable time to start trading, and also assist in determining the correct direction that the market is most likely to move. However, this strategy leaves a lot of room for experimentation.

Using a number of formulas can considerably improve the results of this strategy. For instance, for better accuracy, the trader can add the use Fibonacci levels will enable the trader to detect the last oscillation so that he or she can be able to avoid even the smallest rollback, and thus increase the precision of determining the appropriate time to enter the market.

The Precise Enter strategy is applied in connection with a number of instruments and it also has a number of requirements. Below is a list of the instruments and requirements required while using this strategy:

  • Trades should only be implemented on the daily chart.
  • Trades can be made using any of the available currency pair.
  • The Simple Moving Average with a periodicity of 150 should be used.
  • The Stochastic Oscillator (6, 3, 3), horizontal lines 70 and 30 should also be used.
  • RSI (Relative Strength Index) with the frequency of 3, horizontal lines 80 and 20 should also be used.

The above guidelines are very important in determining the exact time for entry.

For example, if there is an upward trend and the price gets above the 150 Simple Moving Average SMA, the trader should the RSI 20 indicator to be moving in a downward direction and crosses the level of 80. Then the trader should also wait for a confirmation signal by the intersection of Stochastic, which is usually given when the two intersecting stochastic lines get below 30. After all these conditions have been met, the trader should go ahead and purchase “call” binary option. But if the trend starts to change to a downward trend, and the market prices moves below the 150 Simple Moving Average (SMA), the trader should wait until the relative Strength Index (RSI) crosses the level of 80 from the bottom moving up. Then the trader should wait for a confirmation signal by the crossing of the two stochastic lines above the level of 70 for him or her to place a short-term “put” binary option.

Tunneling Binary Options Trading Strategy

This is one of the simplest and most effective binary options strategies there is especially for the beginners. It is based on the intersection of moving averages. Also, another great thing is that this strategy can be basically used on all types of binary options as well as on all currency pairs. The signal for implementing the purchase and sell is usually calculated at an interval of not less than one hour.

This strategy employs several instruments so that the trader can see a buy or sell signal. One of the most used tools in this strategy is the Exponential Moving Average (EMA). Then there is also the Weighted Moving Average (WMA), with a periodicity of 12. Then the other instrument is the RSI indicator with a periodicity of 21.

The EMA are usually two; with frequencies of 18 and 28. These two EMAs form a tunnel of two red lines. This tunnel helps in defining the start and end of a trend. Then the Weighted average with the periodicity of 12 shows the time that traders should start trading. The tunnel lines also help one in determining the current active trend in the market.

Before purchasing or selling traders need to understand that the purchase and sale of binary options can only be made when the formed tunnel shrinks until the lines almost combine into one.

The purchase of a “call” binary option is possible if the weighted averages (WMA), of a periodicity of 5 and 12, cross the tunnel that is formed by EMAs. The actual signal for the purchase is when the WMA with the frequency of 5 crosses the WMA, with a frequency of 12.

On the other hand, to purchase a “put” binary option, the trader should look for the time when the weighted moving averages with intervals of 5 and 12 cross the tunnel that is formed by EMAs. The actual sell signal appears when WMA with a periodicity of 5 crosses the WMA with a periodicity of 12 while moving from top to bottom.

However, while the trader is looking at the above-described signals, the trader should also look at the RSI indicator. The trader should only sell if the RSI indicator is below 50 and buy only when the RSI indicator is above 50.

Volatility Tools

Volatility is the measure of the swings as the market prices react and the rate at which these swings change. If a market is said to be a high volatility market, it means that that market has major swings and it is said to be more unstable. On the other hand, if a market is less volatile, it is considered to be more stable since the rate at which the swings change is reduced.

With a high volatile market, it is usually easier and faster to make larger profits with relatively less amount of money since the ROI is in most cases much greater. However, there is usually a very high chance of making the wrong analysis of the market.

If a trader happens to ignore the volatility of the underlying market he or she will in many cases find himself or herself applying the trading strategies wrongly.

The most applicable strategies in markets that are highly volatile: out-of-the-money (OTM) trades and deep-out-of-the-money (DOTM) trades. These two have higher chances of winning because the price savings are more. However, extremely highly volatile markets act as a signal for market reversals.

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