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More Contracts = Less Risk


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More Contracts = Less Risk

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  #21 (permalink)
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I think this all adds up to the importance of keeping a trading journal. It gives you the benefit of putting hard numbers to the equation. And a journal will bring to light all the intangible factors such as a trader's personality and tolerance for risk.

From my own experience there were just too many times I took out my 1 lot at +5 only to see it run for 20 or 30. When I switched to 2 contracts I could still take out the 1st at +5, then move my stop anywhere from -5 or better to be in a free trade. You just can't beat a free trade that runs in your favor.

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  #22 (permalink)
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Since you cited my thesis, you might be interested in: arxiv.org/abs/0901.0401

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  #23 (permalink)
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Every backtest I run shows an optimal profit target and stop. Scaling out is simply selling at sub optimal points. I see scale outs, break evens and trails all making the equitity curver worse than using the optimal target and stop, at least most of the time, depending on percentage of profitable trades.

If you run 3 contracts and use 2 to break even early in the trade, then every time you get stopped before break even your down 3 contracts, and also your selling the 2 break evens at a level that is probably not profitable in the long term, so your sending the final car off to do all the work You could have been stopped out on 3 single contract trades for the same loss.
In my opinion your better off finding the optimal for target (for either draw down or profit factor or whatever) and then use that as you target and then when a trade is entered, leave the screens, don't hang around and be tempted to screw with the target and stop, a b/e late into the trade close to the target seems to work ok.

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  #24 (permalink)
madrid spain
 
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sefstrat View Post
Technically, trading more contracts does not lower the inherent risk, however it allows you to control your risk exposure and thus lower it by using good money management. With one contract you are very limited in what you can do, by using multiple contracts you can scale in/scale out and dynamically manage position size.. Good MM is what will make or break your strategy, it is *vastly* more important than what indicators you use.

My MM technique is somewhat similar to yours. I break up the entire position into 3 different classes: cost covering, scalp, swing. Each class of orders has its own settings for initial stop limit, breakeven handling, trail stop handling, target, etc..

The amount of contracts assigned to each is dynamic. For instance with cost covering, there is a TicksToCoverCosts parameter, if I set it at 2 then based on the total position size, it will adjust the amount of contracts dedicated to cost covering so that commissions for the entire order are covered after 2 ticks. Any additional contracts after that are either scalp or swing orders based on current estimated risk (ie recent trend history, bid/ask spread if applicable)

The reason for differentiating between scalp and swing orders rather than just using 2 classes is because swing orders generally have significantly looser breakeven and trail stop handling than scalp orders. So during ranging or consolidating periods or if making a contrarian move I will use scalp orders primarily. If trending heavily or in a divergence situation at the end of a trend where there may be another small stop hunt but the chance of extended movement is low then it will primarily use swing orders.

This technique is heavily influenced by Joe Ross books, the main difference being that he only uses 2 classes, no 'scalp' orders. He puts a huge amount of importance on trading multiple contracts, in fact he goes so far as to recommend that you not trade until you have enough capital (and enough faith in your strategy) to trade multiple contracts. I would tend to agree with him.

hi, could you check my test of the strategy with 3 and 4 contracts please, and tell me your opinion about what could be better, according to my figures, thanks
alejo

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  #25 (permalink)
madrid spain
 
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and what about scale in?what do you think of this strategy?is valuable the little times you earn a lot pressing against the rest that you close at b/e? or at loss?
thanks

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  #26 (permalink)
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sefstrat View Post
If your strategy is opening positions that don't go at least 2-5 ticks in your favor almost every time, it is not a good strategy, period.

That`s what the strategy must be after,especially for the small accounts.

Though a bit old,but quite nteresting readings by sefstrat,but then it sounds contradicting by saying more contracts == less risk.On the contrary,if you use more contracts,the strategy shouldn`t take off immediately.

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  #27 (permalink)
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alejo View Post
and what about scale in?what do you think of this strategy?is valuable the little times you earn a lot pressing against the rest that you close at b/e? or at loss?
thanks

if using more contracts,in my opinion,would be more reasonable,rather then scaling in, using stoplimit buy/sell orders in the direction your strategy opens.

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  #28 (permalink)
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hondo69 View Post
I think this all adds up to the importance of keeping a trading journal. It gives you the benefit of putting hard numbers to the equation. And a journal will bring to light all the intangible factors such as a trader's personality and tolerance for risk.

From my own experience there were just too many times I took out my 1 lot at +5 only to see it run for 20 or 30. When I switched to 2 contracts I could still take out the 1st at +5, then move my stop anywhere from -5 or better to be in a free trade. You just can't beat a free trade that runs in your favor.

Interesting thread... Let me also point out that we have to guard ourselves against adjusting trades just because it lets us feel good. ie: Free trade, lowered my risk, break even +1, took some profit

I would argue that those four things do not give us an edge, they only help us trade better because it makes us feel good. An example is adjusting a trade to break even +1 most likely has actually decreased your edge and increased your risk... It feels great, believe me I know, but in almost all situations it is the wrong thing to do! You are trading based on what makes you feel good (safer) and not on what the market is actually doing (other traders).

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