In the last decade, forex has gained a bad reputation and there are several books which gave statements like the one given in the following line:
“You are astonished that we still recommend playing strategies for forex market? Don’t think about it! It is impossible to know about currency’s future position will go down or up and guessing the right move to make. But there is no need to panic as the forex trading strategies have been improved a lot from usage of experts over generations. In our book, you will find information regarding the best methods and strategies that help in making profits in forex market and which are been used and polished by the expert traders”.
These new approaches are surely designed to give you more profits in your trading activities. However, it is almost impossible to predict future forex market movements. Therefore, designing a strategy which takes care of the market future uncertainties is a very difficult task. Using these strategies result in futile results and money losses.
In the following lines, you will see some of the strategies used:
The martingale strategy originated in France in 18th century and is a result of excellent scientific and mathematical knowledge of the century.
This strategy says that whenever u lose a coin toss, you should increase the bet size. For example, if a trader makes a bet with some value x for currency to rise at a point P1 and he loses the bet he will just double the betting amount making it 2x and make the next bet for price to rise at next point, P2. If the second bet also fails, then next bet will be with amount 4x for price to rise at point P3. Similarly, this will go on until the trader wins or he goes bankrupted.
As seen, the procedure of trade is simple. If a trader looses at P1, he can still recover the lost amount of his first trade and have reasonable profits if he wins the second trade. This recovering and profit amount is true for all further points too like P3, P4, and P5 etc.
A trader must understand that the short-term results of trader are dependent to each other to successfully carry out the trade and win. In other words, one loosing trade has some impact on the result of the subsequent trader. Thus, keeping track of the outcomes can ultimately lead to a good win which covers previous losses.
However, as we have discussed earlier each result of subsequent trade is independent of each other and there can be uncountable points where trades can rise or fall endlessly without breaking the continuity. More on this will be discussed when we will talk about gambler’s fallacy.
The anti-martingale strategy, as the name suggests is the reverse of the martingale strategy but it also has the same results as subsequent results are independent of each other and there is no possible way to predict the upcoming outcomes.
The difference in this strategy from the previous one is that instead of doubling the betting amount for the trades he losses he will have to double the betting amount for winning trades. For example, if he has loss bet of amount x at point P1, he will continue betting the same amount for P2 until he wins the bet at P3, then he will double the amount to 2x for next bet at P4.
The problem with this strategy is very obvious. Why should the trader double the amount of trade at P3 if this result has nothing to do with the result of the P4? As the results of each trade are independent, this does not make it a valid strategy.
Gambler’s fallacy is a term used to describe the nature of the traders who expect a certain result as a result of subsequent trades’ results. Thus, whether a trader is using martingale or anti-martingale strategy believes that there will ultimately be result of his favor if he keeps on following a certain pattern between points (P1, P2, P3 etc). This is as much wrong assumption as it is to assume that while tossing coin, after five heads the sixth one will be tail.