Multiple contracts to be able to exit at multiple levels. I don't put them all on at the same level, and I don't take them all off at the same level.
Works best for me, mainly for psychological reasons. If I didn't have a brain and had zero emotion, then all in/all out is usually mathematically superior. But not realistic for many discretionary traders, in my opinion, due to psychological impact. The more under stress you are (greed, not in, etc) the more mistakes you will make. Scaling allows you to be in more.
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I've moved from trading the equity futures -- NQ and ES -- day in/day out to only using them after stronger (depends on market context) selling, to buy dips usually, holding out for larger profit targets. So, they have become the big guns to me, to use more selectively. Usually only trading 1 contract.
For the day trading stuff I'm doing, I'm now mostly using ETF's -- QQQ and SPY, sometimes IWM after heavier selling (what's that?) and larger cap stocks with recent good stories, scaling in to smaller positions -- usually about 1/4 of a futures contract position per buy with the ETF's -- and taking more frequent, smaller profits on strength. Maintaining only 'disaster' stops, far down and never letting my total position get to be too large. In this way, I can ride out 'the heat' and not die the thousand cuts 'stops' death. Of course, I am doing some holding over night.
Equities trading starts at 4AM EST at IB so the window of trading being closed is not too terrible for the liquid ETF's but of course, futures beats that hands down.
Running it like any retail business - you gradually acquire inventory and sell it as you can and you NEVER want to let your inventory become too large.
But yes, scale in and scale out. In this way, I'm able to take advantage of the market's movement without having to be picture perfect on the entries.
"The Future Ain't what it used to be"
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I have been experimenting with adding layers when price goes against me. My strategy is to use my indicators to enter on the lower low on a sell off and hopefully the bottom. However, since the indicators are not perfect, having an additional layer to once again try to enter at the lower low increases my chance of profit since the price only needs to go back to the average price to break even. Thus, I am entering my total capital at different entry points to compensate for the inaccuracy of the indicators. I have tried this live on USO using 100 shares, since USO is so volatile and hard to judge the bottom of a sell off. The times I put on the additional layer, I was always profitable, recovering the draw down on the bounce. However, trading like this has been stressful even at small sizes, so I am considering going back and simulating to see if I can be profitable with stops. I have simulated the layer technique for one and a half months using one contract on NQ and have been able to make 200 to 300 dollars a day with no losing days trading live simulation mode on Ninja Trader. However, doing it with real money takes more courage than I currently have since the draw down can be significant. Also, on futures there was always a bounce after the sell off which was helped by the extended trading hours. I am interested if other people use layers and have found a disciplined way to add layers and become profitable and how they go about setting a hard stop.
Side Note (Layering is used by correlated stock pairs traders, taking advantage of the high probability of regression to the mean of correlated stock pairs. The drawback is that trading stock pairs takes alot of capital).
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Why are you doing that? To gain more leverage, to exploit more sophisticated knowledge of price behaviour, to simply gain size or something else?
No one can answer this very dangerous question for you. I always believed that leverage should be fixed and the approaches should not change. This is flawed concept - the market behavior changes everyday, sometimes you must protect yourself aggressively (often to the point of not taking a trade all day or multiple days).
Other days, the market is giving you money, you must lever up. For me, on a range day, I make my size smaller, or bigger days, when the market is emotional (when I know people are in pain) I lever up.
Understand your weakness, and that of your opponent (maybe that opponent is me). A tiger or lion will preferably not attack a fully gorwn male bison, but he will aggressively chomp away at the young ones. Be very selective.
Leverage and compounding are great tools, in both directions. I say, all in, all out, scale in, scale out, always in - are all correct depending on the day and the market mood. And they could be all wrong as well if incorrectly applied.
Wait till the market participants are in pain, then act with impunity. For example - today was Friday, everyone traded lightly, most gone by lunch, did you see the wide range action in the last hour in CL, after 3hrs of boredom. The market decided to act, caught some shorters by surprise and took them out, and then turned around and took the chasers by the scruff of their neck and sliced their heads off. It was poetic.
Last edited by Deucalion; February 3rd, 2012 at 09:28 PM.
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