The martingale system promises traders simple and guaranteed profits. But does a binary options robot work with the martingale system? We answer this question and explain how you can manage your money well with a binary options robot.
- Does a binary options robot work with the martingale system?
- Is binary options trading gambling – and what do a robot add to the equation?
- How to set up a binary options robot to become rich
With the answers to these questions, you will immediately be able to understand whether or not the martingale system works with a binary options robot and how you have to setup your binary options robot to become rich.
Does a binary options robot work with the martingale system?
Many traders love the martingale system because it seems so simple and so genius. You simply double your investment after every losing trade, and as soon as you win a trade, you have made a profit. You then start the cycle anew and begin with your original investment. This system promises you that you will end every cycle with a profit and that you will become rich in the simplest way possible.
Unfortunately, this system does not work. Sooner or later, you would lose so many trades in a row that you will be unable to double your investment again and end up bankrupt. Believers in the martingale system try to ignore this possibility, but there is a good reason why there is no millionaire out there that has made its money with the martingale system. To understand why let’s look at an example.
Let’s assume that you have an account balance of $10,000 and that you invest $25 on your first trade with the martingale system. $25 a realistic assumption for you first investment since it is the minimum requirement of many brokers and only 2.5 percent of an account balance of $10,000 – a relatively safe approach.
Now, how many trades would you have to lose in a row to end up bankrupt? After your first losing trade, you would have to invest $50, then $100, and so on. The entire row of your increasing investments would look like this:
$50, $100, $200, $400, $800, $1,600, $3,200, $6,400.
After you eights losing trade, you would have to invest $6,400. Unfortunately, you have invested exactly the same amount in all the trades you made before combined, which means that you have only $3,600 left. You are unable to continue to martingale money system, and you have lost over 60 percent of your money. The robot will invest all of your money in the ninth and last trade, and if it loses that one, you are broke.
Now, the big question is, “How like is such an event?” Luckily, this is easy math. With an average robot, you win 60 percent of your trades. This means your odds of losing a single trade are 40 percent. The odds of losing nine trades in a row are 40 percent to the power of nine, which is 0.0026 percent. Now, 100 percent divided by this result is 3,815, which tells us a lot:
- After 3,815 trades, your odds of ending up bankrupt would be 100 percent. (Mathematically.)
- After 1,908 trades, your odds of ending up bankrupt would be 50 percent.
- After 382 trades, your odds of ending up bankrupt would be 10 percent.
Now considers this: the average robot makes 5 to 15 trades per day. Assuming an average of 10 and 200 trading days a year, this means that a robot would make 2,000 trades in an average year. This means, even in your first year of trading, your odds of losing all of your money are over 50 percent. Since most traders start with less than $10,000 but still have to invest $25 because it is the minimum requirement of their brokers, their odds of making money with a martingale system are even lower.
Are you really willing to take this risk? If you trade the system for two years, you are almost guaranteed to lose all your money. Only an incredible stroke of luck could save you – you might as well play the lottery.
Simply put, there is a big downside to the martingale system. But how about the upside? Let’s focus on this question in the next part.
Is binary options trading gambling – and what do a robot add to the equation?
In the last part of this article, we determined that your chances of losing all your money with a martingale system after one year are roughly 50 percent. That is bad. But if the other 50 percent of the equation would make you a millionaire, the system would be worth a shot, right? You would simply invest $10,000 a few times until you make it through the first year. And once you do, you have made more than enough money to make up for the few losses. To evaluate the martingale system, we, therefore, have to consider its upside, too. Let’s do that.
What is the best-case scenario for the martingale system? If you make it through your first year, how much money would you have? Let’s stick with the same example as in the first part: you have an account balance of $10,000, invest $25 per trade, and win 60 percent of your trades. Additionally, we assume that you get an average payout of 70 percent on every trade – a realistic assumption. How much money would you make with a martingale system over one year?
Believers in the martingale system will tell you that you will make a lot of money every time you win a trade. This assumption is the basic assumption on which the martingale system is built. Unfortunately, it is also completely wrong.
Here’s what can happen on your trades:
- If you invest $25 in your first trade and win the trade, you would get a total return of $42.50, which would net you a profit of $17.50.
- If you lose your first trade, you will double your investment, invest $50 in your second trade, and get a total return of $85 if you win the trade. Since you already invested $75 in your first two trades combined, your total profit has shrunk to $10.
- If you lose your second trade, you would double your investment again, invest $100 in your third trade, and get a total return of $170 if you win the trade. Since you already invested $175 in your first three trades, you would start losing money with your third trade, regardless of whether you win it or lose it.
- If you lose your third trade, you would double your investment once more, invest $200 in your fourth trade, and get a total return of $340 if you win the trade. Since you already invested $375 in your first four trades combined, you would lose $35 even if you win the trade – the gap starts to widen.
- This tendency continues. Once you reach the eighth trade where you have to invest $3,200, you would lose $935, even if you win the trade.
Now we can calculate the winning expectancy of this martingale system. On an average trade, you would make a profit of merely $6.26. Assuming ten trades a day and 200 trading days a year, this would result in a profit of $12,516.98 on an investment of $10,000.
Now, all our numbers are rough estimates. Additionally, we ignored all costs of such a system, for example the roughly $1,200 for the robot. As a rule of thumb, we can nonetheless conclude that the best case scenario with a martingale system is a profit of roughly 100 percent in one year.
With this premise, the martingale system resembles a coin flip. You can double your money or lose it all, and your odds are fifty-fifty. If you like these odds, there is no need to create a martingale system. You can simply go to the next roulette table and bet $10,000 on red or black. The odds and the potential payout are the same, but you can save yourself a lot of work and a year of waiting.
This example shows the basic problem of a martingale money management system: even if you avoid the huge downside, the upside is too unattractive to warrant the effort the system requires. We, therefore, must conclude that the martingale is essentially useless.
You can adjust the basic assumptions for your martingale system in any way you want – maybe you want to invest less in every trade or triple your investment after a loss – but the two basic problems remain. There is an incredibly high risk and a reward that is too small to justify this risk. No adjustment can change that.
When you triple your money after every trade, for example, you still turn a profit after losing six trades in a row. You will, however, also reach the point where you are unable to increase your investment much sooner. With such a system, you would be broke after half a year – guaranteed.
The martingale system has unsolvable problems, and there is no way around them.
How to set up a binary options robot to become rich
If the martingale system is useless, then what do you do? How can you manage your money more effectively? The answer to these questions is a percentage-based money management.
With such a money management system, you invest a fixed small percentage of your overall account balance in every trade. Ideally, this percentage is somewhere between 2 and 5 percent.
Contrary to the martingale system, a percentage-based money management decreases your investment after a losing trade and increases it after a winning trade instead of the other way around and makes small adjustments in direct proportion to your account balance. This has the advantage that you can survive losing streaks and continually grow your account balance when things are going your way. Use this type of system, and you will be fine.
Unfortunately, most robots lack the option of investing a percentage of your account balance in every trade. With these robots, you have to define a fixed investment per trade that is equivalent to the percentage of your overall account balance that you want to invest. With an account balance of $2,000 and the strategy of investing 2 percent of your account balance per trade, for example, you simply set a fixed investment of $40 per trade.
After a few days, you come back, check the performance of your robot, and adjust your settings.
- If your account balance has increased, you increase your investment per trade.
- If your account balance has decreased, you decrease your investment per trade.
With this system, you let your robot do the market analysis and the trading, and you manage your money. This reduces your weekly time investment to a few minutes a week and can generate much better results than a martingale system.
Combining binary options robots with the martingale system is an ineffective trading strategy. The system has a high chance of ruining you, very likely within a year, and even if you survive the year, your return is no better than if you simply played roulette. Consequently, the martingale system has no place in the world of binary options.
If you want to manage your money more effectively, use a percentage based money management system. Invest a small percentage of your overall account balance on every trade. Keep the percentage constant and adjust the absolute value as your account balance changes.
Follow these tips, and you know everything to manage your money well.