If you consecutively lose money on trades and, to recover your losses, double your investment on each subsequent trade, you’re following the Martingale strategy. That way lies potential ruin .
Even on something with a certain probability of just one in two (50%), such as the toss of a coin, using the Martingale strategy has been proven, eventually, to bankrupt people.
To succeed using Martingale, you need an infinite amount of resources and an infinite amount of time. You have neither.
It gets worse. Stocks and shares, currencies and indices do not follow logical regular patterns but can behave unpredictably or be influenced by external factors, making the Martingale strategy doubly dangerous and trebly troubling.
The Martingale idea was used by French gamblers in the 18th century. It was first detailed in probability theory by Paul Levy in 1934 but previous work on probabilities by Richard von Mises in 1919 prompted Jean Ville to study the idea and coin the name Martingale in 1939.
The real development of the Martingale theory was then carried out by an American mathematics professor Joseph Doob and appeared in his work Classical Potential Theory and Its Probabilistic Counterpart in 1983.
The main impact was to convince casinos to bring in maximum bets and to add extra non-paying digits (0 and 00) to the roulette wheel.
That meant that while there remained a 50/50 chance of getting red or black, there were also two green slots that paid nothing.
As financial psychologist Kim Stephenson says: “Casino owners can afford to buy a new yacht as soon as the old one gets wet.”
The toss of a coin
You have £100. You need to make 10% profit or £10 a day. Your first bet is £10. If you win, you cash in. If you lose, you now have just £90 and you need to win £20 to make today’s target. You bet £20. If you win, you can stop. But if you lose, you now have just £70 left.
To make your 10% target, you need to bet £40. If you lose again, you now have just £30 left. That means you need to bet £80 to make your 10% target, so you need to borrow half your original stake, or £50.
You have had three flips of the coin and you are already deep in debt.
That kind of run of losses can, and does, happen. In 2001, Nasser Hussain, England cricket captain, famously lost 12 pre-match coin tosses in a row.