Is the Velocity Algo Trading Strategy Using Martingale Really Scary?
- Writer
- Mar 4
- 6 min read
Updated: Nov 5
The Velocity Algo trading system is an innovative approach, utilizing a reversal strategy where trades are executed upon receiving signals of a trend reversal. The EA (Expert Advisor) will place a sell order when an upward trend turns downward and will initiate a buy order when a downward trend shifts upward.
Impressive Backtesting Results
Consider the impressive backtest results of Velocity Algo on the USD/CAD currency pair over a 15-minute timeframe using the Tickmill MT5 broker since 2010. Starting with an initial capital of $10,000 the total profits amount to an astounding $798,241.
Please note that past performance does not guarantee future results.
This system has been actively trading on a live account for over a year now. The performance can be monitored on Myfxbook, showcasing satisfactory returns and maintaining a low drawdown throughout its operation.
How Does Velocity Algo Work?
Velocity Algo operates by opening buy orders when prices close below the lower envelope and below the lower Bollinger band. Conversely, sell orders are initiated when prices close above the upper envelope and upper Bollinger band.
The take profit for the first order is set at 20 pips. However, if the market doesn’t reverse as anticipated, the EA will place a second order with the same volume. If both initial orders fail to secure profits, the next order will double the volume of the previous one. For orders 6-8, the volume is reduced to 1.5 times the size of the prior order to minimize overtrading, limiting the maximum number of orders to eight.
The stop loss for Velocity Algo is set at -60%. Based on backtested data from 2010 to 2024, if users configure the lot size method to auto lot with a maximum of 50 or choose a high-risk level, this system can navigate the market and provide returns over the 15-year period. However, it’s important to remember that investing carries inherent risks, as past returns do not guarantee future performance. Unexpected events—such as wars, economic changes, pandemics, or natural disasters—can all contribute to currency volatility.
Recommendations for Optimal Performance
Our team does not recommend setting the auto lot method higher than 50. A sudden market alteration could lead to losses of up to -60% of your investment portfolio. However, trading with lower risk and volume can help your portfolio endure various market events longer, increasing the opportunity for price reversals that allow the EA to clear outstanding positions.
If the EA places 1-3 trades, it will look to secure profits based on a specified number of pips. Yet, if it fails to close profitable orders and reaches the fourth trade, the system will prioritize capital preservation by closing all orders immediately when the total profit reaches zero, effectively protecting your investment.
The Risks and Rewards of the Velocity Algo System
In our investment portfolio, we utilize a risk level with an auto lot size of 30. According to Myfxbook, users may perceive the returns from this system to average around 1.69% per month, or approximately 21% annually. While this may seem low to some, it is crucial to understand that aiming for sustainability in trading without incurring losses is challenging. High returns often come with high risks; thus, when users start utilizing the EA (Expert Advisor) for trading and see consistent profits from each order, it’s essential to be cautious about increasing lot sizes or risks too much. If an extensive trend arises in the market and orders are executed with excessively high lot sizes, the potential for unfavorable outcomes increases significantly. There's also the risk of losing as much as 60% of the capital.
The Case of Overtrading
Many traders seek high returns within a short period. We simulated trading using the Velocity Algo system in 2024, with an auto lot size of 500, starting with a capital of $1,000 from January to June. Over the six-month period, the profits could soar to $2,998.77 equating to a remarkable +300% return. This means that an initial investment of $1,000 could yield approximately $3,000 in profits, and a $10,000 investment could result in a $30,000 gain. This represents the dream returns for many traders.
However, as we continued running the EA into August, an unexpected event occurred. The previously sideways price movement of USD/CAD transformed into a consistent downward trend. Consequently, our EA began opening buy orders with a volume of 0.35 in its first and second trades, doubling the order volume with every signal. Unfortunately, the price continued to drop, preventing the EA from closing orders for profit. Ultimately, the portfolio decreased by 60%, necessitating a cut loss as per the pre-set plan.
The Martingale EA: Balancing Risk and Reward
In the Forex market, many traders shy away from using a cut loss in their Martingale systems, including our Velocity Algo EA. The advantage of this approach is that it allows us to maintain sufficient funds to cope with unexpected market events. The core principle of the Martingale strategy is to double the trade size after a loss, based on the theory that eventually, one will recover all losses. If we don’t set a cut loss at 60% and the market reverses after a significant downturn, we could emerge without any losses. Conversely, if the market continues its downward trend without a preset stop loss, our capital could be wiped out entirely. Therefore, our Martingale EA includes a stop loss percentage in its system, which users can adjust according to their preferences.
Profitability Despite Market Trends
To illustrate, even if we do not withdraw profits over seven months and the EA cuts losses by 60% in the eighth month, we would still end up with a profit of $1,133, representing a 113% return on investment.
However, what if bad luck strikes, and we begin trading in August?
Starting with $1,000, we might initially see profits but soon encounter a severe downward trend in the market. The cut loss could lead to a substantial loss of -$491. In such a scenario, one might consider themselves unlucky. However, events like this are not uncommon in Forex trading. Even if we establish a risk level (Auto_lot) that has historically been sustainable, the future can always surprise us. Thus, if an investor opts for a lower risk level than the default setting in our system, they will likely earn less but substantially reduce their risk of loss. This approach might guarantee a small cash flow each month, bringing comfort and ensuring a happier investment experience.
Backtesting Results
The backtest results below demonstrate the impact of using an auto lot size of 40 (the recommended starting value in the EA) from early to late 2024, yielding an overall return of 30%. For the author, this is quite an admirable return.
From the graph, we can see two distinct drawdown periods where the EA experienced significant losses. However, because we maintained a lower risk level and our EA function was conservative in volume, our portfolio did not suffer excessive losses, allowing it to weather the storm until the market turned in our favor, ultimately enabling us to close trades profitably.
Tailoring Your Investment Strategy
Investors can choose a strategy that best suits their preferences. We offer a flexible option for users to customize their risk levels. Some portfolios may be overtraded for excitement, with manageable capital invested, while others may focus on long-term holdings that provide steady cash flow, even if the returns are modest. Alternatively, one could employ multiple EA portfolios, each utilizing different strategies to diversify risk, such as high-risk versus low-risk portfolios, or strategies like Martingale, trend-following, counter-trend, or grid trading.
This flexibility allows investors to curate their trading experiences, reflecting their individual risk tolerance and investment goals. Ultimately, it's about finding the balance that works best for you.
Recommendations for Using EA Velocity Algo
- Account Type: It is advisable to use accounts with lower spreads, such as ECN, Raw, or Pro accounts.
- Leverage: Set leverage at **1:100 or higher**.
- Initial Capital: A starting capital of **$1,500 USD** is recommended for Standard accounts, or **1,500 US cents** (equivalent to **$15 USD**) for Cent accounts.
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