Martingale strategy is the best trading strategy in the bearish market; Know the details about how this works (with exclusive video)

Nepal’s stock market is an unidirectional market where selling first and buying later is not available. For the traders, bearish market is an off-season and they have to wait for bull market to trade agressively.

In bear market traders need to stay out of market and that can be frustrating. So we are here with the trading strategy which can be effective in strong bear market but this strategy requires huge capital.

In Martingale strategy we need to double the investment amount every time when the price gets lower and has to exit when stock retraced some percentage. For this strategy an investor should have huge back up fund because no one knows the depth of bearish market, it could go to lowest.

How to trade with this strategy?

First we need to find the tentative lower limit of the stock price and distribute investment fund in a way so when it goes to the lowest, we should have fund to buy stock at that time.

For example:

If the stock price of ABC Company is Rs 200 and if the tentative lower limit of the stock is Rs 100, and if I decided to invest my fund with martingale strategy then I need to distribute total fund in a way so if stock goes to Rs 100 then I should have enough fund to backup.

If I start my investment with Rs 1000 and decided to doubled my investment on every 5% decrease in price.

Let us assume that the price of the stock has decreased by 5% on every month and loose around 50% of initial price in 14 months.

As shown in above table, total investment amount stands at around Rs 1.63 crore in 14 months. The data above shows that when I invested last amount at the lowest price of Rs 102.67, average cost had drop down to Rs 107.80 which means if the stock price rise by 20% to Rs 123.2 from lowest bought price then my profit would had been 14.28%. 

If stock price retrace 100% to initial price of Rs 200 then my profit would had been Rs 1.4 crore (85.52%).

The core concept of Martingale trading strategy is to bring down the average cost near to the last bought price and this strategy required huge capital. We should not buy stock at the price higher than the last bought price. So in above case we have to buy stock only if its price goes below Rs 102.67. This strategy is very popular in the forex market. The forex market remains open for whole 24 hours and can trade with Martingale strategy in one day but in case Nepal that is not possible.

Can we apply this strategy in Nepal stock market? 

Let’s check this strategy in Nepal Stock Market. I have considered my investment in the strong bearish market of last two years.

The table below shows the level of NEPSE index after the boom of 2016.

As we can see above, NEPSE index hit all time high on July 2016, and we assumed we had started our investment with Rs 5,000 and had decided to invest double fund on every 5% decrement in its value. The highest bought price was Rs 1881 and the last bought price of NEPSE index was Rs 1185.5.We had invested Rs 25 lakhs and owned 2.15 thousand shares on the lowest price of NEPSE.

At the end, we owned a total of 4110 shares with total investment of Rs 51.15 lakhs and our average cost had dropped down to Rs 1220. Now if NEPSE index increased by 25 points then we will witness a profit. The NEPSE index has reduced by around 600 points and amazingly an increment of 25 points from this level can cover all those losses. To trade with martingale strategy In Nepal stock market, we need to hold our investment for more than six month and that demands heavy emotional discipline.

In this article we assumed, we were doubling our investment amount on every 5% decrement in stock price but if we increase this level to 20% or more, then the total investment amount will be comparatively less.

For understanding Martingale Strategy in detail, see the video below: