Origins of Martingale Strategy
The Martingale strategy was originally developed as a gambling strategy in 18th century France. Since a gambler with infinitive wealth will certainly win, it was seen as a “sure thing” by many wealthy players. Some of them won such large amounts in a short period of time that a number of gambling joints banned the use of the system. The simplest form of it was flipping a coin. If the gambler guessed wrong, he would double his bet every time until he guessed right. If he guessed right, he would repeat his original bet. Let’s see an example:
Martingale Coin Flip Strategy
Original bet: $1
I’m guessing that heads will come up every time.
First flip is tails, I bet $2.
Second flip is also tails, now I have to bet $4 according to the strategy.
I guess right this time and heads comes up.
Now I am winning -$1-$2+$4= $1.
So, if I am able to double the bet each time I’m wrong, I will eventually win the original bet amount when I’m right, even If I’m wrong ten times in a row.
And that’s the beauty of this strategy; if you have the bankroll to double the bet many times it is extremely likely that you end up winning eventually. It is not unusual that gamblers using this strategy will win ten days in a row.
Martingale and Probability Theory
Probability theory says, knowledge of past events never helps predict future events. This means that expected returns will remain the same no matter how many times a particular result has come up. Basically, in a coin toss if you have thrown heads ten times in a row, there is still only a 50% chance that it will come up an eleventh time.
So, what does that mean for a binary options investor? It means that you should not make assumptions based solely on past results. However, you often get valuable information from results of the past, which can be used in the future to make more profitable investments. But the fact that something has happened often does not mean that it (or the opposite) will happen in the future. You will need other indicators to make such assumptions.
Martingale strategy originates from gambling