The Martingale strategy recommends that the value of every new trade should be continually increased after a loss. This trading technique was first conceived in the 18th century France and was based on the theorem that you cannot lose all the time.
When this gambling system was originally used in casinos, proponents repeatedly doubled their bets each time they lost, on the premise that they would eventually win.
The concept of the Martingale has also been used in a similar way with Forex Trading. To do this, traders select to either go short or long and then always stick with that direction. Should they lose, they then keep doubling their stake on the assumption that they will eventually achieve a winner.
However and on rare occasions, the price of a currency pair can just keep moving in the losing direction, without any reversals, till eventually the trader’s account is totally depleted.
If you are a Forex novice, the exponential factor of the Martingale should be of serious concern. For example, consider that your account balance is $10,000 and you are trading single mini-lots. If you kept doubling your bet every time you lost, your entire account balance would be desecrated if you were unfortunate to experience several consequent negative trades.
All martingale systems normally tend to fail because, in reality, traders do not possess infinite funds. In addition, Martingale systems can only be profitable if the chance to win is at least 0.5. In Forex trading, the broker’s spread tends to mitigate this possibility. Many traders have adapted the Martingale into various formats that have achieved dubious degrees of success.
Still, Martingale trading systems are very popular in Forex automated trading because they can be made to look very interesting and profitable, especially to Forex newbies. This isn’t to say that there are no profitable martingale systems out there; however you have to be aware of the risks involved.
Forex Basket trading involves placing orders with each one comprising a set of currency pairs. Typically, a basket is constructed in order to achieve a set objective and this technique is commonly used by automated traders, hedge funds and large institutional investors who have significant amounts of money to invest. Small investors also use basket trading as a method for mitigating risk. Another key benefit is that basket trading allows investors and traders to be more efficient in managing their trades.
Many traders create baskets using hedged or correlated currencies in order to minimize risk. Hedging is when a currency pair is traded long and short at the same time. However, as many countries, including the USA, have banned hedging. Forex correlation can be used to overcome this problem.
Correlation defines the movement relationship between two currencies over a period of time. A positive value implies that the two currencies move in similar directions whilst a negative one implies that their movements diverge.
One simple basket strategy is the ‘jumping slots’ technique whose rudiments are as follows. A basket is created consisting of two sets (five pairs each for example) of correlated currency pairs so the two sets are fully hedged. Using a demo account, set 1 is traded long whilst set 2 is shorted. The basket is then viewed so that the most profitable currencies pairs are at the top. After a few days, all the long trades should occupy the top five slots whilst the short ones the bottom five or vice versus.
The objective is to wait until one of the bottom five jumps into a slot within the top half. This pair is then traded in its original direction using a live account. The normal practice is to close the trade once the demo version has reverted back to the lower half of the profit/loss table. If you intend to create a trading system based on such a technique, then you need to invest time determining specifics as well as calculating the win:loss ratio and expectancy of your strategy very carefully.
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