On the martingale strategy

The martingale strategy was invented in the 18th century in France.

This tactic has traditionally been used in several speculative games, such as "High card takes it all." If you fail in one round of the game, for example, you can put double in the next round till you win.

The Martingale technique is a risk-seeking investment tactic. We recall that risk-seeking is the acceptance of greater risk, which in finance is often associated with price volatility and uncertainty in investments or trading, in exchange for the possibility of higher returns. The primary premise behind the Martingale method is that you cannot lose all of the time, thus you should increase the amount allocated to assets, even if they are dropping in value, in anticipation of a future increase.

Martingale methods are based on mean reversion theory. Mean reversion, often known as reversion to the mean, is a finance theory that proposes that asset price volatility and historical returns will eventually revert to the mean or average level. A stock's observed volatility can jump above or below its mean, but it always appears to be confined around its mean level. High volatility is usually followed by low volatility, and vice versa.

We should notice that the average price and the most probable price are two distinct concepts. When a set of equally good prices is offered, the most probable price is not their arithmetic mean. Because the ratio of the most probable price to any particular price should not be affected by the unit in which the prices are calculated. Furthermore, the most probable price is independent of the order in which the prices are gathered.

The Martingale method is sometimes equated to gambling in the hopes of breaking even. When a gambler using this approach loses, he instantly increases the size of the following bet. The gambler will ultimately balance out with a victory if he regularly doubles his bet when he loses. This presupposes the gambler has a limitless amount of money to bet with, or at the very least enough money to reach the winning reward. Indeed, a few consecutive defeats under this approach might result in you losing all you brought with you.

When a gambler bets x that a currency would rise at time t1, and his bet fails, he simply doubles the amount to 2x and bets again that the price will rise at time t2. When the bet fails again, he will raise the amount to 4x and bet the price will be up at t3, and this will continue until he wins what he wants or he is bankrupted due to a margin call.

Example: Assume you have a coin and want to play a heads or tails betting game with a $1 beginning stake. The coin has an equal chance of landing on heads or tails, and each flip is independent. (The previous flip has no bearing on the outcome of the next flip.) With each lost coin flip, the martingale method increases stake sizes. You would finally regain your whole loss, plus $1.

To win, the martingale gambler assumes that short-term trading results (coin tosses) are not independent of one another. That is, the outcome of one coin toss or one losing transaction influences the outcome of the next trade in line, making it less likely to be a loss.

If the winning rate of each round is treated as an independent event, then the ultimate profit probability is very close to 1. That is, the more consecutive involvement you take, the greater the likelihood of profit. For example, the first round has a 50% winning percentage, the second has a 75% winning rate, the third has an 87.5 percent winning rate, the fourth has a 93.75 percent winning rate, and the fifth has a 96.875 percent winning rate.

The bet you put in for the last win are twice as large as the previous one, thus the prior loss may be offset by the winning one, resulting in a profit. As an example, you put down $10 the first time, $20 the second time, $40 the third time, $80 the fourth time, and $160 the fifth time. If you win, your total profit will be 160–80–40–20–10=$10.

Martingale is also referred to be a "Win with Enough Funds" method. If you have sufficient finances, you will undoubtedly be profitable in the end. But, in fact, no one will have infinite funds. Even with a 99.99 percent winning percentage, one person may be unfortunate enough to lose the entire investment.