The Martingale Strategy reduces average position costs through continual position increases, which is somewhat similar to the DCA (Dollar Cost Averaging) method. However, while DCA increases positions periodically in fixed amounts and in fixed time intervals, the Martingale Strategy increases positions when prices fall. When prices rise to desired levels, the Martingale Strategy will sell the entire position.
Initially developed by Mr. and Mrs. Martingale in a casino, the Martingale Strategy originated as a gambling strategy:
Assuming that the probability of winning a gambling round is 50%, by doubling the wager after each loss, the gambler would recover all previous losses and win a profit equal to the initial stake when a win occurs.
For example:
If I were to bet 10 dollars in the first round and lose, then I would bet 20 dollars in the second round. If I win the second round, I would recover the 10 dollars I lost in the first round plus win a profit equal to the initial 10 dollars that I wagered in the first round. However, if I were to lose the second round, I would bet 40 dollars in the third round ... and so on and so forth. As long as I win once in the end, I would not only recover all losses, but also win a profit of 10 dollars. After making a profit, the same process can be repeated.
Investing is different from gambling. When gambling, if you lose, you lose the entire wager. But in the investment market, declines occur slowly and in percentages. Therefore, you can choose to increase your positions whenever prices fall by certain percentages. You can also choose to take profit whenever a certain amount of profit is made.
For example: