Martingale

Martingale is a money management strategy where you double your position size after every losing trade, aiming to recover all previous losses plus a small profit on the next winner.

How Martingale Works

| Trade # | Size | Result | P&L | Cumulative |

|---------|------|--------|-----|------------|

| 1 | 1 lot | Loss | -$100 | -$100 |

| 2 | 2 lots | Loss | -$200 | -$300 |

| 3 | 4 lots | Loss | -$400 | -$700 |

| 4 | 8 lots | Win | +$800 | +$100 |

In theory, one winning trade recovers all previous losses.

Why It's Dangerous

• Exponential risk: 6 consecutive losses at 1 lot starting size = 32 lots. 10 losses = 512 lots.
• Guaranteed account destruction: Given enough time, a losing streak WILL exceed your account size
• Drawdown explosion: A few consecutive losses can breach your account instantly

Example: $100K Account with $5K Daily Loss Limit

| Trade | Size | Loss | Running Loss |

|-------|------|------|--------------|

| 1 | 2 contracts | -$500 | -$500 |

| 2 | 4 contracts | -$1,000 | -$1,500 |

| 3 | 8 contracts | -$2,000 | -$3,500 |

| 4 | 16 contracts | -$4,000 | -$7,500 → BREACHED |

Why Prop Firms Ban It

• Creates catastrophic risk in their risk pool
• Breached accounts generate losses for the firm on payouts already made
• Demonstrates poor risk management
• Easily detected through trade size analysis

Alternatives

• Fixed fractional: Risk the same % per trade regardless of previous results
• Anti-martingale: Increase size after wins, decrease after losses (pyramid into winners)
• Kelly criterion: Mathematically optimal sizing based on edge and win rate