What is a Martingale System?

Martingale system refers to an investment system which holds that the investments dollar value continues to increase despite it experiencing successive losses. It is a system believed to help investors double up his or her profits so that whatever that was lost can be recovered from the doubled profits. This system was introduced in the 18th century by a French mathematician by the name Paul Pierre Levy.

How Does the Martingale System Work?

The Martingale system is basically a type of betting that is guided by the principle of doubling down. This statistical concept holds that there is no way you can lose every time and so, investors should be confident to increase the amount of money they put in investment even though there is a decline in value at the moment. Based on the martingale system, they should continue investing with anticipation that things will eventually turn around, and they will be able to make much more profits in the future to recoup the losses. Usually, the system is a comparison of a type of betting in a casino. Gamblers who use the martingale system of betting, always assume that after numerous losses in a bet, they will eventually double their win in the next bets. They believe that the numerous they will even out with the anticipated double win. However, this requires a gambler who does not run out of cash. He or she should have enough money to continue placing the bet until that time when he or she eventually wins.

How the Martingale System Works

The concept works as follows: Lets assume that John places a bet of either heads or tails starting with $2. Note that each flip is usually independent, therefore, the next flip is not in any way affected by the outcomes of the previous flips. For this reason, the probability of the coin landing on heads or tails is equal. So, if John places a bet on the heads and he decides to stick to it in every flip, he will eventually win, and his winnings will be doubled. According to this system, the first win should be able to recoup all that John had lost in his previous bets, and also leave him with profit which equals the amount he had placed on the original bet. This betting is cyclic meaning that after John's big win, he will have to go back to the drawing board, where he will place an original bet again until he wins the second time, and so on. When applied in investment, this strategy is of the assumption that you can rely on one trade and still be able to make much profit. This means that regardless of the losses the business may be experiencing at the moment, an investor should not give up but continue investing with anticipation that the persistence will eventually turn into a big fortune. Note that just as a gambler requires a steady flow of cash so that he or she can continue placing the bet until he wins, so is the investor. He needs to continue investing until the investment is able to give him or her higher returns. 

Risks Associated with the Martingale System

Like any other gambling with a high possibility of losing, the martingale system is also a gambling activity with high risks. Those who engage in it stand to lose huge sums of money in the process. Investors who embrace this system when investing may lose their cash if things do not turn out as anticipated. Some of the well-known risks associated with the martingale system include the following:

• There is a high possibility of running out of money before one is able to make the anticipated big win or high returns.
• In betting, the gambler may reach the set table limit before making a win. When a table limit is reached, it means that the gambler has exhausted his chances of doubling the bet and, therefore, is not able to recover what he has lost in the previous bets. In other words, this system exposes one to high chances of incurring huge losses, especially where things decide to work against the gambler.

Key Takeaways

• Martingale system refers to an investment system which holds that the investments dollar value continues to increase despite it experiencing successive losses.
• This system was introduced in the 18th century by a French mathematician by the name Paul Pierre Levy.