What Is the Anti-Martingale System?
The anti-Martingale, or reverse Martingale, system is a trading methodology that involves halving a bet each time there is a trade loss and doubling it each time there is a gain. This technique is the opposite of the Martingale system, whereby a trader (or gambler) doubles down on a losing bet and halves a winning bet.
Both systems are trading strategies commonly used in the foreign currency markets but can be applied elsewhere.
- The anti-Martingale system is a methodology to amplify winning streaks and minimize the impact of losing streaks.
- Opposite of the traditional Martingale system, the anti-Martingale strategy involves doubling up on winning bets and reducing losing bets by half.
- It essentially a strategy that promotes a "hot hand" mentality when on a winning streak and a stop-loss strategy when there is a losing streak.
How the Anti-Martingale System Works
The original Martingale system was introduced by French mathematician Paul Pierre Levy in the 18th century as a way to maximize the statistical outcome placing a series of risky bets. In a Martingale strategy a gambler or trader doubles his bet each time he loses, and hopes to eventually recover those losses and make a profit with a favorable bet.
On the other hand, the assumption of the anti-Martingale system is that a trader can instead capitalize on a winning streak by doubling his position.The anti-Martingale system accepts greater risks during periods of expansive growth and is considered a better system for traders because it is less risky to increase trade size during a winning streak than during a losing streak. This type of thinking may fall into the "hot hand fallacy" trap, but when markets are trending up, the anti-Martingale system could be successful for a trader, who may pick off a series of positive trades before a loss interrupts his streak. However, a doubling down on a given winning bet exposes him to a single large loss that may wipe out previous gains.
When there is a loss you end up cutting a losing bet in half. Here, a trader is in effect practicing a stop-loss discipline that is generally recommended in trading. The anti-Martingale system is somewhat of a play on the Wall Street maxim of "letting your winners run and cutting your losers early." It may serve well during momentum-driven markets, but markets can turn quickly against traders. The Martingale system, on the other hand, is more of a "reversion to the mean" scheme that may be more suitable in directionless, meandering markets.
Example of the Anti-Martingale System
To understand the basics behind the strategy, let's look at a basic example. Suppose you have a coin and engage in a betting game of either heads or tails with a starting wager of $1. There is an equal probability that the coin will land on heads or tails, and each flip is independent (the prior flip does not impact the outcome of the next flip). Assume you always bet on heads.
If the first toss is indeed a heads, you will win $1 and then bet $2. If it is again heads, you will be $4 on the next flip. It is tails, and so you will halve your next bet and wager $2 again.