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Mathematics Behind A Forex Trading Strategy

Forex trading and stock indices trading approaches are divided into two types. In the first case, the trader relies on their or third-party forecasts regarding the movement of the currency pair, building a trading system based on them.

The second approach involves the use of the method of mathematical modelling.
Mathematics Behind a Forex Trading Strategy

At the same time, it does not matter which trend prevails in the market — it is enough that it simply exists. What is a mathematical strategy in the Forex market? What is the probability of making a profit when using it?

The Essence and History of the Method

The mathematical approach to trading in the Forex market involves building a grid of trading orders, the totality of which will sooner or later bring profit to the trader.

A distinctive feature of such a system is its independence from the future direction of the exchange rate.

All that is needed for its implementation is movement in the market. Therefore, it is recommended for use on volatile pairs, which average a distance of 100-200 points or more per day.

Almost all systems of such a plan work on the Martingale principle. The method appeared several centuries ago and was initially intended for playing roulette. Several decades ago, well-known stock players adapted it to the peculiarities of financial markets.

The original look of the Martingale strategy was simple. The roulette game began with the lowest possible bet on one color, which doubled after each loss. Based on logic and probability theory, the possibility of the same color falling out is significantly reduced after each time.

This statement is the basis on which the mathematical strategy is based. Since the player constantly increases the bet size, just one profitable transaction covers all the losses incurred earlier and brings him a profit. How is the Martingale method used in Forex trading?

Mathematical strategy based on the Martingale principle: features of the application in the Forex market

Trading currency pairs using the Martingale method differs from betting in a casino. Initially, the trader opens a deal with a minimum lot, immediately placing a take profit and a grid of orders in an increased volume at the same distance from each other in the same direction instead of a stop loss.

What Does It Look Like In An Example?

Mathematics Behind A Forex Trading Strategy

Let's assume that the trader unsuccessfully entered the market on September 23rd, continuing to sell the pair at the very bottom of the trend (the place is marked with a blue line). If the downtrend continued, closing the deal in profit was assumed at 180 points from the opening point.

In the event of a pair reversal, order No. 2 was placed again to sell the pair at a distance of the same 180 points above the place of the first entry into the market. Similar manipulations were performed after the same number of points.

You need a reliable broker to work with, such as Exness.

As we can see from the figure, the currency pair began to move in a downtrend only after the opening of the third order in a series of transactions along with the initial one. The mathematical strategy brought the trader a profit of 180 points. How did it happen?

At the time of opening order No. 2 with an increased volume, the trader recorded a loss of 180 points. After the upward movement of the pair continued during the opening of Order No. 3, a loss of 180 points was added to a loss of 360 points since a lot of order No. 2 was 2 times larger than the volume of the first operation.

In total, at the last entry into the market, the accumulated losses of the trader amounted to 540 points. Then the pair turned down, and one deal, which exceeded the volume of the previous order by 2 times and was 4 times greater than the first one, brought the trader an income of 720 points.

The net profit was 180 points, which the trader expected to receive at the time of the initial entry if the downward movement continued.

How does this method differ from traditional trading approaches based on technical analysis? The result does not depend on the direction of price movement. Applying the mathematical method to the situation depicted in the chart above, the trader would have made a profit no matter where the price went. If it fell, the deal would be closed by taking profit; if it grew, the profit was fixed after a reversal.
Pitfalls
Mathematics Behind A Forex Trading Strategy

The chart shows the most optimistic scenario, in which the mathematical strategy fully met the trader's expectations. Unfortunately, this is not always the case. Not a single trader has a dimensionless deposit, which has self-replenishment property.

A series of orders do not always consist of 2-3 deals. Imagine how a trader feels, whose previous 5 trades were closed at a loss, opening the sixth one? By this time, the size of his deposit has already decreased by 30-50%, and if the trend does not urgently reverse, this or the following order may reset the trading account.

Trading on the Martingale principle is characterized by a high level of risk and requires careful testing on historical data. Without sufficient Forex trading experience, beginners are discouraged from using such trading methods.

If You Still Decide To Trade Using The Martingale System

There are several ways to reduce risk when using a mathematical strategy. The main one is limiting the number of opened deals. Usually, the first entry is made on the signal of some working trading system.

It is necessary to collect statistics on the maximum number of unprofitable trading operations in a row over a long period. The number of orders in the grid should be limited to a slightly larger number than the maximum number of trades with a negative result for the entire period of analysis. Based on this information, you must select the initial lot for trading.

The second way to reduce risks is to develop a system of coefficients when opening a grid of orders. A new deal can be opened with a volume of not 2 but 1.5 or 1.6 times larger than the original one. Accordingly, the amount of profit after closing the last profitable order will be less than when doubling each transaction.

The mathematical method can be successfully used in aggressive trading with a high level of risk, but the profits earned should not be reinvested since the chances of losing everything are very high.

For safe trading in the Forex martingale market, you should carefully consider the entry points and the number of trades required to achieve the optimal result. Remember that the profitability of trading depends very much on the broker you choose!
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