Strategy and performance
Martingale
Doubling position size after each loss so that one win recovers the sequence. The required size grows exponentially, so the strategy needs unlimited capital to survive a long enough losing run.
GFN’s figure
A martingale sequence starting at 0.5% risk on a $100,000 GFN account reaches the 2 Step 8% floor after five losses - 0.5, 1, 2, 4 and 8% together exceed the $8,000 available.
In detail
Martingale,explained
Martingale produces a long, smooth run of small wins followed by a single catastrophic loss. It is not a strategy with a low probability of a bad outcome; it is one that concentrates the bad outcome into one event.
On an account with a fixed drawdown floor it fails faster than on a live account, because the floor arrives long before the capital does.
Related
Terms thatcome with it
Most rules only make sense next to the ones they interact with. These are the entries this one depends on.
Grid trading
Placing orders at fixed intervals above and below a price so that positions accumulate as the market moves. It profits from oscillation and accumulates exposure in a sustained trend.
Averaging down
Adding to a losing position to improve the average entry price. It lowers the break-even level and raises the size of the loss if the position keeps moving against you.
Risk of ruin
The probability that a sequence of trades takes an account to its breach level before it reaches its target, given a win rate, a reward-to-risk ratio and a risk per trade. It is driven mostly by position size.
Maximum drawdown
The total loss an account may take before it is failed. Expressed as a percentage of the starting balance, it sets a floor: touch it and the account breaches, whatever the account has made up to that point.
Position size
How many lots a trade is placed in. It is calculated from the dollar amount being risked and the stop distance, not chosen first - which is the reverse of how most traders approach it.
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