Martingale and anti-Martingale method
Many have heard of the application of these two methods in trading, but not everyone knows what exactly they are. Meanwhile, every trader should have an idea of what the Martingale method and the anti-Martingale method are. Both of these methods are described below with specific examples of their use.
The Martingale Method originated as a betting system for roulette. The essence of the method is that by increasing the rate in the event of a loss, you always end up winning. Let’s take a closer look at the betting system using the Martingale method.
For the convenience of the calculation, we will take the size of the base rate equal to one rupees. When playing using this method, you first bet one rupees, then if you lose, you double your bet, and if you win, you return to the base size of the bet – one ruble.
Let’s say you bet one rupees on red and lose, then your next bet is two rupees. If you lost two rupees, bet four and so on until the first win, after which you bet one rupees again.
Thus, in case of each win, your capital will increase by the size of the base bet (in our case, by one rupees). This is easy to verify by simple arithmetic calculations:
Let’s say we have a chain with two losses and one win.
1st bet – 1 rupees – loss
2nd bet – 2 rupees – loss
3rd bet – 4 rupees – win
Loss: 1 + 2 = 3 rupees
Winnings: 4 rupees
Profit: 4-3 = 1 rupees
You can make similar calculations for any sequence of losses-wins and make sure that the total profit after each next win will be equal to the size of the base bet (in our case, one rupees).
But the size of the bet after each next loss, on the contrary, will grow. Moreover, it will grow exponentially.
There is an old parable about a cunning mathematician and a greedy ruler. The essence of this parable is that the ruler urgently needed the help of one mathematician, but he categorically did not want to pay him. They bargained for a long time until the mathematician proposed the following calculation scheme. He went to a nearby chess table, removed all the pieces from it and put one grain of rice on the first cell. Then he suggested that the ruler fill the entire board with rice in such a way that he had to put two grains on the second cell, four grains on the third, and so on, constantly doubling the number of grains for each new cell. The mathematician called this amount of rice the price for his service, while the ruler, without hesitation, hastened to agree to such a meager, from his point of view, price. However, when it came time to calculate, it became clear that such an amount of rice,
I don’t know how the heroes of the parable finally solved their problem, however, in the context of this article, something else is important. It is important to understand how small numbers, through a simple geometric progression, reach astronomical values.
So, what we have, applying the Martingale method in practice. The probability of winning is several times higher than the probability of losing. But the size of this win is scanty compared to the amount that the bets reach after several losses in a row. When making bets using the Martingale method, sooner or later you will face a situation where a chain of continuous losses will lead to the size of the bet increasing to the size of your entire capital (and all this for the sake of winning 1 rupees). Thus, you will inevitably lose everything, provided that you psychologically can withstand the process of raising rates on a long chain of losses (and the probability of such a chain appearing the more, the more you bet).
In contrast to the Martingale method, there is the Anti-Martingale method. Its essence is to increase the rates after each win and to return to the base size of the rate in the event of a loss.
Let’s say we have a chain of two losses and three wins with a profit cutoff after three wins in a row.
1st bet – 1 rupees – loss
2nd bet – 1 rupees – loss
3rd bet – 1 rupees – win
4th bet – 2 rupees – win
5th bet – 4 rupees- win
Loss: 1 + 1 = 2 rupees
Winnings: 1 + 2 + 4 = 7 rupees
Profit: 7-2 = 5 rupees
When using this method, it is necessary to set a limit for increasing the size of the bet (the so-called profit cutoff). For example, to return the size of the bet to the base size after every three or, for example, five wins in a row. Without these cutoffs, the method will not make sense, since there are no endless winning chains, and the very first loss will nullify all the earned profit, and you will constantly return to the “broken trough”.
In principle, it is possible to use the Anti-Martingale method or its modifications when playing on the stock exchange, at least it will not allow you to quickly lose yourself to smithereens **. But the Martingale method is strongly discouraged when playing on the stock exchange.
* You can, for fun’s sake, play around with a calculator and count the number of grains of rice needed by the ruler to pay off the mathematician.
** However, of course, you can earn money, the main thing is to correctly and wisely approach the creation of your own system based on the Anti-Martingale method.