Martingale Theory
Sunday, February 5th, 2012Martingale theory part 1
Martingale theory part 2
MARTINGALE THEORY
Would you be interested in a trading system that is practically 100% profitable?
Developed in the 18th century, this approach is centred on probability theory and if you have sufficient funds, it has an almost 100% success rate.
Known as the Martingale, this strategy was mainly used in Las Vegas gambling halls.
It is also the main reason why casinos now have gaming minimums and maximums, and why the roulette wheel has two green markers (0 and 00), as well as odd or even bets.
The problem with this tactic is that in order to attain 100% effectiveness, you must have a lot of cash.
As this principle is based on mean reversion, one wrong trade can bankrupt an account.
Also, the amount of money risked on the transaction is much greater than the likely gain.
In spite of these drawbacks, there are ways to improve the Martingale approach.
We are going to look at how you can improve your likelihood of making money using this very high risk and complicated strategy.
But first, what is the Martingale Strategy?
Popular in the 18th century, the Martingale strategy was introduced by a French scientist by the name of Paul Pierre Levy.
The Martingale was initially a type of gaming trend that was founded on the premise of “doubling down.”
A lot of the background work on the Martingale was done by an American mathematician called Joseph Leo Doob, who wanted to disclaim the probability of a 100% profitable gaming strategy.
The mechanism of the model obviously entails a starting bet, however, every time the bet loses, the stake is doubled in a way that, given adequate time, one win will make up all of the previous failures.
The introduction of the 0 and 00 on the roulette table was intended to break the mechanism of the Martingale, by granting the game with more than two potential outcomes besides the odd versus even, or red versus black.
This effectively killed off the long-run gains the Martingale could realise destroying any motivation for using it.
Let’s look at a basic example to help grasp the basis of the Martingale strategy.
Suppose we took a $1 coin and played heads or tails, there is a 50:50 chance that the coin will fall on either heads or tails.
As each individual toss is independent, the preceding toss has no effect on the next one.
So if you always bet on heads, in the end you would, given an unlimited sum of money, at some point land on heads.
The technique is based on the concept that just the one successful transaction is needed to turn your account around.
As an example, let’s pretend that you have $10 to gamble. You start off with your first gamble of $1.
You bet on heads, heads comes up and you win $1. You now have $11.
You then carry on betting $1 until you don’t win.
But if the following toss doesn’t win, your ‘account’ moves back to $10.
On the following bet, you stake $2 hoping the coin lands on heads; if so, you would recover your earlier losses.
