Sometimes new tech is nothing but rehashed old tech.  Such is the case with the Martingale system.  Under the Robot settings of BINARY OPTION ROBOT(tm), a drop down menu allows you to choose Martingale as the “Trading System.”  This feature is supposed to be cutting edge technology that will give you a trading advantage.  However, you may be surprised to discover that the Martingale system is not new.  It actually dates back to the 18th century, as it describes a betting strategy widely used in France.  The theory was later applied more widely to probability theory by Paul Levy in 1934.  Although, the term “martingale” would not be added until later by Jean Ville in 1939.

In my previous post Was That Email Robot Generated?, I mentioned the Martingale system.  The automatic email sent out each week by BINARY OPTION ROBOT(tm) recommends enabling the Martingale system on the Robot settings.  However, in this post I quickly explained that I would be ignoring this recommendation for now.  That is because, while this tried and true system does promise big, you must have a substantial amount of capital to carry it out.  Also, there are certain limitations to the theory when applied the purchasing binary options through the Robot, which drastically increases the probability of risk, deviating to the seemingly foolproof claims of the Martingale theory.

So what is the Martingale system?  In a nut shell, it means doubling your investment each time you lose a position in the hopes that the next time a position is a win, the profits will balance out losses.  In theory, it is a way to stay afloat.  This theory is also where the phrase “doubling down” comes into play.  This phrase often applies to gambling, but has been used by traders for years to indicate that a position has been doubled in the belief that a recent loss will reverse itself.

The Martingale system works most efficiently in a gambling scenario where the odds are 50/50.  For example, if one were placing bets on the results of a coin flip.  Statistical analysis demonstrates that with enough rounds, a coin flip will produce heads 50% or the time and tales 50% of the time.  If one were to follow the Martingale system, and double the betting amount with each loss, with enough coin flips, it should balance back out.  The final profit on the next winning play will restore all money that was lost on previous coin flips.  The chart below demonstrates these results in action.

flippic

In theory, when the odds are 50/50 and the payout is a 100% return, the Martingale system is guaranteed to work 100% of the time.  Is that convincing?  Are you ready to take this system to Las Vegas?  Don’t worry.  The Vegas casinos are ready for you, and they see you coming a mile away.  There is no free lunch.  Casinos have made provisions that undermine the perfect effectiveness of this system.

There is one serious factor to consider with this theory.  The Martingale system also assumes in its basic formula an infinite amount of money and an infinite amount of game plays.  In practice, no one has an infinite amount of money.  Therefore, the biggest limitation to this system is the maximum amount of funds available for the trade, coupled with any other restrictions imposed on maximum trading amounts.

In casino trading, the closes game that will give you 50/50 odds that lends itself to Martingalesystem is betting on red or black on the the roulette wheel.  The casinos combat this in two ways.  First, they mess up the odds by adding a green 0 and 00 slots to the wheel.  This disruption in the 50/50 distribution of possibilities throws the odds ever so slightly in their favor.

roulette

Although, slightly altering the odds is not the biggest safeguard that casinos have in place.  In addition to the green positions on the roulette wheel, the casinos also limit the Martingale’s infinity through a maximum bet.  For example, The Mirage has a minimum bet of $25 and a maximum roulette bet of $20,000.  At first glance, that seems like a fair range.  Until you do the math.  As indicated by the betting amounts below, after only twelve consecutive losses following the Martingale system, the maximum betting amount no longer permits recovery.  From infinity to twelve; that is quite a reduction.

Results of Doubling Bet Eleven Times:

  1. $25
  2. $50
  3. $100
  4. $200
  5. $400
  6. $800
  7. $1,600
  8. $3,200
  9. $6,400
  10. $12,800
  11. $25,600 (Max Bet $20,000)

Not only does the max bet limit you to eleven consecutive losses before the system falls apart, starting with a minimum bet of $25 and placing the eleventh bet for the maximum amount of $20,000, this losing streak would cost a total of $45,575 to achieve.  Many casinos impose the $20,000 maximum bet.  The MGM Grand has only a $10,000 limit, so the Martingale system falls apart after only 9 consecutive losses.

How does this relate to binary options trading with the Robot?  For starters, there are broker limitations.  As I am not currently limited to Tradorax as a U.S. trader, the limitation imposed by this broker is $15,000.  That places the collapse of the Martingale system after the tenth consecutive loss.  However, there is another factor that ruins the Martingale’s system of recovery.  Tradorax does not offer a 100% return on investment.  Tradorax offers investment return rates of 70%-85%.  That means that even if by the 10th trade, if it is a successful trade with the best return rate of 85%, the return will be $23,680.  However, the investment in that position cost $25,575.  At the very last chance to break even, the best case scenario is still a $1,895 loss.

Will I ever use the Martingale system?  Maybe.  For now, more data from real time trading is needed.  If the the Robot demonstrates performance rates that are reasonably consistent, that may indicate the likely hood of staying in the lower range of the tenth trade.  If using the Robot demonstrates results that never exceeds more than five consecutive trades, the Martingale system will be a lot more attractive.  Even at this attractive level, it would still require a minimum balance of $775.  Until both of these criteria are met, the “trading system” will remain in “classic mode.”