Martingale

economic-dictionary

The martingale is an investment strategy that consists of betting on the total lost with the intention of recovering it. Applying the martingale, each time a bet is lost, the amount wagered on the next bet is doubled. In this way, it seeks to recover the lost capital.

The idea on which this strategy is based is the very low probability that a certain event will occur many times in a row. An example that illustrates this strategy well is that of a coin bet on heads or tails. We are going to bet 1 euro that it comes out heads, and if it goes wrong we double.

  1. We bet on face. We lose Bet: 1 euro
  2. We bet on face. We lose Bet: 2 euros
  3. We bet on face. We lose Bet: 4 euros
  4. We bet on face. We lose Bet: 8 euros
  5. We bet on face. We lose Bet: 16 euros
  6. We bet on face. We win Bet: 32 euros

In the sixth launch we finally won, we recovered the 32 euros invested and also we won 32 euros. The real profit results from subtracting from the 32 euros of profit everything previously lost.

Profit = 32 - 16 - 8 - 4 -2 -1 = 1 euro

With the above, it is evident that, faced with a series of consecutive negative results, a lot is risked to gain little. Although the probability that the same side of a coin will come out 20 times in a row is negligible, the data of the bet of the toss 21 is interesting. Something more than a million euros of bet. If the coin is perfect, such a streak will not occur or, rather, it will be almost impossible. However, when it comes to financial assets that do not have a defined mathematical expectation, using this strategy leads to a rapid and total loss of capital.

Many novice traders use this strategy in their early days, opening trades of the same sign to offset losses. All of these traders end up losing their money. On the stock market, the martingale breaks all investment principles related to risk management. Among them is that of "cut losses."

The history of the martingale

The history of the martingale dates back to the 18th century. At that time the players themselves dismissed the martingale as a naive strategy typical of tough minds. Its name originates from the French town of Martigues (martingales in French), which is located near Marseille.

Among the authors who conducted a study to show that there were no infallible betting strategies, Paul Pierre Lévy stood out, who introduced the theoretical concept of the martingale. Later the concept of martingale would be coined as a statistical term.

The martingale as a statistical concept is a stochastic process. And as a result of its study and theoretical development on a statistical basis, the antimartingale emerged. The antimartingale is a stochastic process but in reverse, which consists in radically doing the opposite. That is, every time you lose, risk less than the previous bet. The bet is only increased if there is a series of consecutive winning streaks.

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