Futures Martingale Bot: Understanding and Optimizing Futures Trading with Martingale

How does a futures Martingale bot work?

The strategy’s origins have different versions depending on who you ask. However, most historians believe that the term comes from misspelling the name of one John Martindale who owned a big casino in France in the 18th century. The floor of the main hall always had a couple of hired advisors who would push losing players to double down on their bets to make back what they’d lost.

This disingenuous business practice soon proliferated throughout France and some other European countries. The name Martingale became common by the end of the century. The world of math and statistics did not let this particular phenomenon fly under the radar with several mathematicians trying their hardest to explain why this betting strategy is just an alteration of a famous St. Petersburg paradox suggested by Nicolas Bernuolli in 1713.

How does one use a Martingale strategy?

This approach is designed for games with binary outcomes. While many people believe that any financial market is a binary system with traders either winning or losing, many nuances and additional outcomes (stagnating prices) make retail trading much more complex than just a coin toss. Nevertheless, it is possible to use the approach and its elements in trading.

The strategy can be explained as follows:

1. You bet a small amount on a certain outcome (for example, $1).
2. If you lose, you double the bet and add the original bet ($2 + $1).
3. You double the best and add your initial bet after each consecutive loss.
4. If you win, you start the process all over again.

While it seems that the strategy is very consistent since you simply wait until your desired outcome appears in a sequence, there are several important factors that make the expected value of this strategy negative:

• The strategy works only with infinite capital, infinite time to play, and unlimited position size. If either of these parameters are finite or limited, you will lose eventually.
• The size of any given position increases exponentially with each consecutive bet since you need to double the amount to make Martingale work. At first, you won’t notice how quickly the cost rises, but the initial $1 bet turns into $32,000 in just 15 consecutive losses (over $64,000 lost).
• The strategy does not take into consideration additional costs associated with retail trading (fees, spreads, and commissions) as well as some aspects of derivative trading. For example, many options contracts only give you a 75% payout for a correct guess.

A custom made Martingale trading bot for futures uses this approach with some adjustments to account for the factors outlined above. However, it is still a losing strategy in the long term even if you manage to achieve some good results quickly.

Risks of using a futures Martingale bot

Aside from obvious issues with the strategy that we discussed previously, some other important considerations should be contemplated by anyone who wants to attempt to use the Martingale strategy in retail trading.

Here are some of these factors:

• Market manipulation. The strategy relies on the unpredictability and true randomness of a system within which it is used. However, speculative markets are prone to manipulation and can be controlled by high-frequency trading, large asset movements, and various economic events.
• All market positions in the market for derivatives are leveraged. You have to use a margin trading account to work with futures and options. Short selling an asset is also possible only with borrowed funds offered by brokerage service providers and centralized crypto exchanges. All your market positions will be extremely risky.
• The strategy is an all-in approach that can be detrimental for your portfolio. Since you always need funds ready to be used for the next bet, diversifying investments and using other investment strategies alongside the Martingale system is not feasible.
• Liquidity issues. It is possible to encounter a situation where the market does not have enough liquidity to support large position sizes preventing you from continuing on the path of increasing orders. For some obscure tokens that do not have a large user base, you can run into liquidity shortages quickly and be left holding the bag in the end.

Many experts believe that you cannot build an efficient Martingale bot strategy due to position sizing and risk management issues. It is also quite hard to estimate the profitability, since results are dependent on the randomness of outcomes and traders are encouraged to repeat their trades regardless of the outcome of the previous ones.

Despite multiple glaring problems with the strategy, thousands of retail traders tried to use it and build something that could be profitable in the long run. Unfortunately, the vast majority of such attempts end in a financial tragedy. One can try incorporating some ideas and concepts that are inspired by the Martingale system in their investment strategy. However, it is impossible to use the approach itself without falling victim to the inevitable.

How to optimize a futures Martingale bot?

While it is impossible to run a Martingale system that does not suffer from poor expected values, you can use some elements of it to create an automated trading bot that will produce good results. Retail traders interested in using such robots should focus on backtesting and using paper trading before applying their strategies to the real market. Only after extensive testing, one can try running a Martingale-inspired bot to trade financial assets.

Here are some examples of how you can implement some elements of the Martingale method into your trading strategy:

• Use the Martingale principle of increasing consecutive market positions to run a Martingale Grid bot. The idea behind grid systems is to build a robot that can autonomously trade on your behalf using the DCA approach while placing sell orders for each of opened buy orders. By increasing position sizes for each consecutive trade, you will be able to make the grid system slightly riskier and more profitable.
• Reverse Martingale. You can use short selling to create market positions that hedge against already existing ones if you feel that the market is changing directions. Each of your long trades can be countered with a short order. It looks like a glorified stop loss order on paper, but a smart retail trader can navigate a tricky area of volatility with bot orders ultimately reaching profitability.
• It is possible to use the Martingale approach for all strategies that involve consecutive order placement. For example, DCA buying can be done with doubling the position size for each new purchase. If you catch a downtrend, this method may lead to significant discounts for each buying session.

The best futures Martingale bot settings

Just like any other trading approach in the world of finance, the Martingale system is vulnerable to many general risks such as unexpected volatility, economic uncertainty, and liquidity shortages. You cannot predict market trends reliably due to the reactionary nature of the crypto market that shifts its course after economic events and even snarky remarks of billionaires on X (formerly known as Twitter). When building a system that incorporates concepts of the Martingale method, you should use common risk mitigation practices.

Many automation vendors such as WunderTrading allow users to adjust various parameters of their automated trading systems to create bots that are not as vulnerable to different economic risks. Here are some settings and features that you should use to make your bots more efficient:

• Always use delayed orders. Stop loss and take profit orders allow you to set target profitability and avoid excessive losses. It is recommended to use these delayed orders for each market position. It is especially important when you work with leveraged positions since you want to avoid margin calls at all costs.
• Use different position sizes to mitigate losses. You can adjust and even program the increase of each consecutive position size to create flexible trading systems and limit potential losses. Automation experts suggest using a small portion of your portfolio to invest in bots and never allow them to place orders bigger than 1% — 2% of your overall capital.
• Use strategy tester at TradingView and the backtesting functionality at WunderTrading to build a successful crypto bot. You should always test your investment ideas with demo accounts and paper trading features offered by CEX and automation platforms.

Alternatives to futures Martingale bots

If you are interested in high-frequency trading or novel investment approaches in the world of crypto, take a closer look at some other offerings from automation vendors:

• Machine learning trading bots. Many companies, including WunderTrading, are implementing artificial intelligence in their products to allow their clients to benefit from trading systems created by complex machine learning algorithms. The new AI-assisted statistical arbitrage product from the WunderTrading platform has been quite successful so far.
• Use custom bots that receive trading signals from your own strategy. Many experts believe that people who learn technical analysis can create trading methods that exceed the efficiency of something premade. You can use a variety of analytical approaches with multiple technical indicators producing high-quality signals.
• Engage in social trading. Some retail traders you can follow use unconventional trading approaches and open many orders simultaneously and frequently. If you want to increase trading volumes, follow these traders while adjusting stop loss and take profit settings according to your personal preferences and limitations.

Is a futures Martingale bot profitable?

One of the issues with any strategy inspired by the Martingale system is that you have to deal with a lot of uncertainty and unpredictability while facing the looming threat of running out of money to continue trading with each consecutive loss. The expected value of strategies like this one is low or negative making it hard to justify using them as an investment strategy.

Some ideas like increasing position size for consecutive orders or trading with the implied randomness of the market in mind can work, but you should be aware of risks associated with taking risky approaches. Incorporating them into a DCA or grid bot may lead to higher profits briefly, but long term implications are still negative.

Use these strategies sparingly and do not rely on them as your only investment strategy. A Martingale-inspired system can add to your portfolio and produce some profits, but you should put the biggest chunk of your capital in something stable and reliable like holding $BTC, staking $ETH, or grid trading altcoins with some good potential.