Limiting losses

Martingale is a gambling system in which the stakes are doubled after each loss.

Figure 6.1 – Playing roulette

If you play roulette, bet $10 on red, and you get red, congrats, you’ve won $10. If you get black, you lose the initial $10, then you double down, betting $20 on red. Black is the outcome again; you lose $20, and you bet $40 on red. Red comes and you’ve won $40 minus the row of losses totaling $30, so you’ve actually won $10.

This might seem a smart system until you calculate the budget you need in order to win the $10 that you’ve bet on red after getting black 10 consecutive times. That’s $20+$40+$80+$160+$320+$640+$1,280+$2,560+$5,120+$10,240 = $20,460.

So, would you risk $20,460 to win $10?

What if there are 11 consecutive blacks?

You do the math.

Even though most traders started trading to gain profits, one of the most important aspects of trading and investing is how...