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More Contracts = Less Risk


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More Contracts = Less Risk

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  #1 (permalink)
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I'm far from an expert trader, but I've learned a few things along the way . . .

1] Set aside your trading system and begin with money management. First, set a realistic goal (20 pips a day for example).

2] Next, determine the number of contracts to trade that provide the optimum risk/reward.

3] Lastly, determine your exit plan.

Once you have completed these step you are in a position to develop a strategy to meet your goal. Here's what I like to use . . .

GOAL: 20 pips a day
CONTRACTS: 3
EXIT: Take off 1 a +5, 1 at +10 and leave the 3rd as a runner.

I use different entry strategies based on market conditions. The strategy I select determines the stop I use at entry. Regardless of the strategy I keep the plan as outline above since it is far more important than any given strategy.

The reason I always enter with 3 contracts is that it reduces my risk dramatically. For example, I enter a trade with a 10 pip stop. If I get stopped out I am -30. I know my risk going in.

As the trade develops, I take off the 1st contract at +5. When the market moves to +8 in my favor I move my stop to break even +1. I am in a free trade at this point. Should it continue on in my favor the 2nd contract is out at +10, which only leave the runner. I exit the runner based upon my strategy.

In summary, my goal is to make 20 pips a day, but I only need to reach the +8 point in the trade to be in a free trade. Knowing this, I can work on developing strategies that give me good odds of reaching the +8 target. You'll find over the long run that the +5 contract pays the utilities, the +10 makes the house payment and the runner is Porsche money.

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  #2 (permalink)
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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.

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  #3 (permalink)
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I wasn't familiar with Joe Ross so I looked up his website and found it very interesting. Looks like there is some real value there and I'll investigate further. Thanks for the tip.

I'm also wondering about your settings for position size, cost covering, etc.? You must have a formula that calculates the proper balance based upon trade class. This has always interested me but I never read much about it. If you can tell me more without divulging any secrets I'd really like to learn more.

- - - - - - - - - - - - - - - - - - - - -

There's a guy I know that likes to bet 4-5 college football games a week. He explained his "system" to me one day and it more or less made sense. But he also mentioned there was typically one game that stood out as a slam dunk bet while the others were less so.

I asked if he bet a larger amount on the slam dunk game and he replied "no", since the Vegas odds makers were much smarter than he. Then he told me the slam dunk games averaged about 80% win rate and the others closer to 60%. Seemed to me the only slam dunk that existed was to increase the bet on the 80% games and lower it on the others.

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  #4 (permalink)
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adding contracts just to cover order fees sounds risky to me. presumably you need 1 to 2 ticks to cover fees. also presumably if you are in a liquid market you would need to have a stop wider than 1 to 2 ticks on same contracts. so now you are risking more, possibly a lot more, to cover commission costs. if you are certain you can easily get 2 ticks then why not just load up a few dozen contracts and call it a day.

don't confuse: i am in complete agreement with money management being more or less the only important thing in trading but this particular technique raises question for me.

additional contracts does not lower risk. i cant wrap my head around that. but i recognize what you are saying. additional contracts empowers you to have much larger and more efficient gains. so we know what you are saying that the end result of trading more contracts is much more favorable because you are in a position to make much smarter decisions and capture a lot more of what the market is willing to give you.

"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain

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  #5 (permalink)
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I'm in agreement with you Caprica and I should have worded my argument better. What I should have said is that 2 contracts can be less risky than 1, if managed properly. And 3 can be even better than 2.

This is based upon the goal of 20 pips a day and only making 2-3 trades a day. Trying to make 20 pips a day trading 1 contract is higher risk because it does not allow you to pocket small gains.

It's all about managing your stops and exit points. Some people I know trade 3 contracts and their exit points are +3, +6 and a runner. Makes perfect sense to me imho. The odds are better than the +5, +10 and a runner as I mentioned above. Just depends upon your trading strategy.

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hondo69 View Post
I wasn't familiar with Joe Ross so I looked up his website and found it very interesting. Looks like there is some real value there and I'll investigate further. Thanks for the tip.

I'm also wondering about your settings for position size, cost covering, etc.? You must have a formula that calculates the proper balance based upon trade class. This has always interested me but I never read much about it. If you can tell me more without divulging any secrets I'd really like to learn more.

My MM library has various strategies built into it, Kelly ratio, Fixed fraction, anti-martingale etc.. the one that I actually use is fixed fractional.

And yea, most trading books are rubbish IMO but Joe Ross is a notable exception. I highly recommend his stuff, even if you don't use his methods exactly understanding how he views the market, how he identifies trends, plans entry/exit, etc.. is very valuable. Traders trick entry is pure gold if you know how to use it right. (Having good money management similar to what I discussed above is the key to using it right, by the way)


caprica View Post
adding contracts just to cover order fees sounds risky to me. presumably you need 1 to 2 ticks to cover fees. also presumably if you are in a liquid market you would need to have a stop wider than 1 to 2 ticks on same contracts. so now you are risking more, possibly a lot more, to cover commission costs. if you are certain you can easily get 2 ticks then why not just load up a few dozen contracts and call it a day.

additional contracts does not lower risk. i cant wrap my head around that. but i recognize what you are saying. additional contracts empowers you to have much larger and more efficient gains. so we know what you are saying that the end result of trading more contracts is much more favorable because you are in a position to make much smarter decisions and capture a lot more of what the market is willing to give you.

If you read the beginning of my reply earlier I mentioned that adding contracts does not inherently lower the risk. What it does allow you to do is manage your level of risk exposure in a way that you cannot when trading single contracts.

You make a good point though, yes it would be very risky to add extra contracts if you aren't sure that your strategy will hit the cost covering target. That ties in with the bit I mentioned at the end about having faith in your strategy. 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.

However, even with a good strategy there will still be many times you get 'faked out' and you find yourself with a few ticks of profit but things are turning on you suddenly. The reason cost covering orders are so important is that slippage can be a real bitch when you are trading many contracts, especially on fast moving markets like CL or spot forex.

It is not rare that I have 4-5 tick slippage on scalp orders when I get in a bad trade. If you are trading 12 contracts thats $500 or so right there. By having the cost covering orders you are covering the costs of all the orders right away and usually making a few ticks of profit also, that way if you have to close all the other orders in a hurry with your breakeven stop you stand a chance of actually breaking even or coming out slightly ahead rather than having your capital eaten away by slippage and commission from bad trades.

Why not just open 12 contracts and close them all at 2 ticks? That is fine if 2 ticks is all you are after, but why settle for 2 when you could have many more.. You will be glad that you collected those extra ticks on the rare times when you do get fully stopped out (which I still find painful even if I am way on top for the day) or the times when you are on the wrong side of a news release and get hit with $4000 in slippage (that one still stings)

Really it depends on your strategy though, the money management is the most important part of the equation no doubt, but your overall strategy has to be designed to work together.. ie the choice of instrument, bar type and sampling frequency, entries, etc.. all of those must consider the MM strategy and vice versa.

That is another thing Joe Ross and other experienced traders continually warn against, choosing your MM strategy based on fear or pain rather than designing a strategy based on your own insight into the characteristics of the market. Most traders fall victim to this because they are undercapitalized, ie they are using too tight of stops.. it is exactly this kind of psychological factor that operators exploit with their stop hunts and fake outs.

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  #7 (permalink)
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Well said Sefstrat. I hope many people read this topic as it is truly the key to trading.

My biggest problem is stop management in the middle of a trade. Although I've tried many combinations there really isn't one or two I can settle on. Since Ninja backtesting doesn't allow testing of stop strategies it's hard to prove one method over another statistically. Therefore, I rely on my gut and trading journal. I'll spend some time this week looking over the MM methods you've mentioned as they really interest me.

- - - - - - - - - - - - - - - - - - - - - - - -

I have a hunch I'm trying to prove based on the following assumptions: a high percentage strategy is in place, goal of 20 pips a day, trading 3 contracts and entry point is easily established. The "secret sauce" is therefore stop management and exit points.

Exit Points: the trader must decide where to take off the 1st and 2nd contacts. It seems like it should be possible to develop a spreadsheet that over time would produce a success ratio for this strategy. Something like:

1 pip = 100%
2 pips = 95%
3 pips = 90%
4 pips = 85%
5 pips = 80%
6 pips = 70%
7 pips = 60%
8 pips = 55%
9 pips = 50%
10 pips = 45%

Assume the numbers are based on a hard stop at 10 pips. Then the trader could change the stop to 11 or 12 pips and do the exercise all over again and compare the numbers. At some point the trader would arrive at the best combination of stop setting and exit points (I'm not concerned with the 3rd contract at this point). It could end up something like: exit at +4 and +9, but when price gets to +7 change the stop to break even +2.

I've tried to write some formulas in Excel but it never comes out quite right. Maybe some of the MM methods you mentioned above will nudge me along.

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You can backtest any type of MM strategy in ninja if you use the custom IOrders interface for handling everything. I thought you could do it using the standard NT order management also but maybe not..

Custom order management is a bit of work to set up initially but very useful as it can be made much more flexible than the standard NT order management. There are samples on NT forum reference section of how to do the basic stop loss and trail stop.

The best MM parameters are highly dependent on the specifics of your strategy and often they will be quite different than you initially expected (in my experience, at least) so it is very beneficial to be able to use the optimizer on them.

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I posted a VERY crude modeling spreadsheet a while ago... hope its not too obtuse... here's the link:

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Guys,

I just wanted to say thank you for giving birth to such threads. In my opinion this is the kind of stuff that people should learn first, before they go on looking for a system that's going to make them rich!

We can never get enough of MM. And people should spend more time on this kind of topic instead of finding the ultimate system. For what is the ultimate system without the proper MM!

/George

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Here is a bit more detail on this concept as I know many of you are still unclear on how it is possible that 'More contracts == Less risk', especially those who have read books by those such as Van Tharp, etc.. The concept that more contracts can yield less risk goes against everything he and other MM 'experts' teach, in fact goes against everything in standard probability and statistics. And yet there are certain situations where 'More contracts == Less risk' is not only possible but highly probable (you can never say absolutely, as risk is uncertainty and thus inherently uncertain)

Defining risk (uncertainty analysis) is an extremely complicated subject because the nature of uncertainty is chaotic, nonlinear, imprecise, constantly changing. That presents a huge problem for statisticians who like to fit things into nice little all-encompassing models as true uncertainty cannot be modeled in this way (at least not given our present understanding).

One thing which throws a lot of people off is that many educators in the trading community (and also in other fields related to statistics/probability) try to stuff things into these simple models such as binomial (ie tossing a fair die) when they do not really fit. This is why for instance people who fully understand the situation constantly rail against the black scholes pricing model with its gaussian assumption.

It is a very similar situation with MM, there is no such thing as a fair die in the markets, the situation is much more akin to choosing from a selection of loaded die wherein you know there is bias on one side of the current die but there is uncertainty as to which side is favored. Standard statistical methods are incapable of dealing with this problem. That is why if you are looking at it from the frame of standard probability theory, you will not be able to grasp why it is possible that more contracts can yield less effective risk.
(see [0901.2987] Maximum Entropy: The Universal Method for Inference for more thorough discussion if interested)

Essentially what it boils down to is that there is an unknown bias in the expected value. In a multifractal situation like financial markets there are different biases at different levels. Obviously predictability varies widely depending on the market mode (ie trending, ranging, consolidating) but in general it is much easier to predict what will happen on a medium/longer term (ie trend will continue, or trend has ended and will reverse being the most obvious ways to predict)

There are certain situations however where the short term future bias is also quite predictable. So the goal is to find situations where both the short term bias and the longer term bias are deemed predictable and in alignment with each other.

In such a situation more contracts can mean less effective risk because it allows you to get into a position early and capitalize on a potential large movement of hundreds of ticks while at the same time affording you the opportunity of partially scaling out early and thus controlling/limiting your risk in the case that new information reveals your analysis of the longer term bias to be incorrect and you have to close those positions quickly, possibly with slippage.

The key insight here (and what is expounded upon in the Maximum Entropy paper linked above) is that risk is relative and not constant, there is no such thing as fixed risk in the real world. You can choose to look at it that way if you want but that is a limited perspective and not indicative of reality. I think we have all seen the results of what happens when you become too certain of inaccurate models of risk.. ie the Gaussian copula applied to assign risk to CDO's otherwise known as Mortgage backed securities

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Great info Sefstrat. Hope others take the time to read this thread.

Puzzler of the Day:
You are in a trade that has setup nicely and moved 2 ticks in your favor. All of a sudden the market quits moving. Trades are still taking place, but the price is not moving. This goes on for 30 seconds. Has your risk changed?

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BTW in my previous post, I was not trying to imply that standard MM techniques such as those espoused by Van Tharp and others are invalid or do not work, they are valuable techniques and they do work. Its just that they are an oversimplification of the true dynamics of risk/uncertainty and IMO there are more effective ways of looking at the situation.


hondo69 View Post
Great info Sefstrat. Hope others take the time to read this thread.

Puzzler of the Day:
You are in a trade that has setup nicely and moved 2 ticks in your favor. All of a sudden the market quits moving. Trades are still taking place, but the price is not moving. This goes on for 30 seconds. Has your risk changed?

The risk has changed as it is always changing but with that information I don't think it is possible to quantify exactly how much or in what way, too many other factors to consider.

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"There are certain situations however where the short term future bias is also quite predictable."

I am inclined to believe in that, but, in my opinion, in order to predict cross market analysis is required

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Cross market or cointegration analysis is definitely very useful, but it is not by any means a necessity in my experience.

I find that price, time and volatility are the most useful variables to analyze. On some markets Volume also but in general I find it to be less useful than the others.


record100 View Post
"There are certain situations however where the short term future bias is also quite predictable."

I am inclined to believe in that, but, in my opinion, in order to predict cross market analysis is required


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selfstrat: some really solid, clear, insightful thinking/exposition there. Thxs.

I am not sure if I get it though. It seems to me that it is not that you reduce 'risk' by trading multiples, rather improve the risk-reward equation, i.e. overall profit expectancy.

On the one hand you initially take more risk, i.e. 3 versus 1 * stoploss. That's obvious.

On the other hand, you greatly increase the chances of getting a greater percentage of the favorable excursion of the trade by scaling out. With 1 contract you have to ensure that your profits exceed losses, whereas with multiples, although of course you still have to do this, you do not have to exit as soon as an initial profit level is reached, initial being that level which, over time, more than pays for stop loss exits and also provides regular profit. With the multiple approach you can take some profit out of the market and then if there is no further extension of the move in your favour, you can get out at break-even. But with one unit, if you were going for more, that break-even exit would mean the entire trade made nothing.

So I think what you are really advocating is this: the ability to scale out of exits improves the risk-reward equation.

Does that sound right or am I missing something here?

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NP..

Yea you have the idea right it sounds like.. the primary diference is in the way I define risk versus the way most traders do. I define risk like an insurance company whereas most traders look at risk as if they were gambling.

In other words, an insurance company bases risk primarily on uncertainty and is weighted on the likelihood of actually losing the full investment, or in their case having to pay out the full premium. Hence why it is based on uncertainty as the less certain you are about possible outcomes the higher the likelihood of losing your capital is, anyone who has ever had an insurance policy knows that the likelihood of them paying out the full premium is extremely low. Insurance companies would not exist if this were not the case.

On the other hand, a gambler looks at it the situation from a pessimistic perspective, 'I have no clue whats going to happen so lets assume the worst'.

Of course, the reason an insurance company can work the way it does is because it has knowledge the gambler does not have, they do have a clue about what will happen based on past experience and understanding of human nature. If you were to simply increase your contracts and still 'place bets' like the gambler, you will lose all your money rather quickly.

In another thread I made a similar analogy between two blackjack players, one who is a card counter and one who is not. It is the same scenario there, the card counter is still technically risking his entire bet with each hand.. however, his knowledge of the cards remaining in the deck allow him to know when to bet big and when to play it safe.

So basically, my point is learn to think like an insurance company, or a card counter.. the pessismistic 'black/white' view of risk employed by the gambler is very limiting in ways that few traders understand. If you study how the market works and understand how to accurately evaluate the true risk of a given situation, you will have a huge advantage over other traders, actually much bigger than the advantage the card counter has over the house or the other blackjack players.

Moreover, you don't have to be a math genius to be able to do this.. in fact it requires no math at all, all it requires is the understanding of how the markets work. Ie, how the operators, banks, market makers and other institutional players make money and even more importantly you must understand how the average trader thinks (ie the gambler). That part you will have to piece together for yourself, many people make reference to various aspects of how the markets work but you will find very few if any who will paint a whole cohesive picture of it, once you fully understand how the players work it will be immediately obvious to you why this is so.

(first rule of fight club..)


cclsys View Post
selfstrat: some really solid, clear, insightful thinking/exposition there. Thxs.

I am not sure if I get it though. It seems to me that it is not that you reduce 'risk' by trading multiples, rather improve the risk-reward equation, i.e. overall profit expectancy.

On the one hand you initially take more risk, i.e. 3 versus 1 * stoploss. That's obvious.

On the other hand, you greatly increase the chances of getting a greater percentage of the favorable excursion of the trade by scaling out. With 1 contract you have to ensure that your profits exceed losses, whereas with multiples, although of course you still have to do this, you do not have to exit as soon as an initial profit level is reached, initial being that level which, over time, more than pays for stop loss exits and also provides regular profit. With the multiple approach you can take some profit out of the market and then if there is no further extension of the move in your favour, you can get out at break-even. But with one unit, if you were going for more, that break-even exit would mean the entire trade made nothing.

So I think what you are really advocating is this: the ability to scale out of exits improves the risk-reward equation.

Does that sound right or am I missing something here?


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  #18 (permalink)
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Also understand how your trading style affects risk. I'll use two examples to illustrate how risk changes over time.

#1] A person enters short with 1 contract thinking the market will move down a few ticks quickly for an easy scalp. After 30 seconds there is little movement in price and the trader has the option to get out at break even now or stay in the trade. The risk on this trade has changed since entry.

#2] A second person has entered shrot at exactly the same time with 3 contracts looking to scale out as the price moves down. Since the market has "frozen" since entry this trader too must evaluate how to manage the change in risk since entry.

In example #1 the trader must make their decision as "all or none" since they only have 1 contract in play. But the 2nd trader has more options and may take 1, 2 or all contracts off the table due to change in risk.

Given the fact that trader #2 has more options available during the trade simply means they have a lower risk over time. It's really no more complicated than that. And if their trading style selects entry points that lend themselves to quick market moves that will in turn reduce their risk exponentially.

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  #19 (permalink)
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The issue with taking contracts off before it reaches say the same level as your initial risk is a difficult one.
eg you risk 10 pips and take your first lot off at 5 pips trading 3 lots.

What you have to acquire is the no of times the mfe goes 6 ticks ( allowing for the bid offer spread) in the direction of your trade.
Because at 5 vs 10 even if you win 66% of the time you won't make any money on that lot.
That is NOT a problem if you know that 75% of the time your entry is good for 6 pips.

But then you must also look at what if - what if I just kept my lots on and took the further exit(s)?
I almost guarantee that you will make more money but your win/loss rate will fall and the drawdown's will be larger.

What scaling out does do is reduce the no of outright losses to 'fails' ie you make 5 ticks but lose 10 on the other 2 lots - you have actually only lost 15 ticks instead of the 30 you originally took. ( which is 50%)

It's all a question of balance but one that is statistical - you must KNOW on average " I can expect eg 8 ticks from my trade 70% of the time" and therefore I manage my trade accordingly and keep an eye on the stats to make sure that figure doesn't change over time.

It is simply insufficient to know that you win eg 55% of the time.

And if you spot the error in this post I can go one step further...

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  #20 (permalink)
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This is probably not what you were referring to, but using a 10 tick stop is an error in my book. The probability of 10 tick adverse excursion which immediately reverses and moves in your favor is extremely high compared with a larger movement (given that you understand how to identify asymmetric risk entry situations where the likelihood of extended adverse excursion is extremely low)

That is closely related to what I was referring to in the post above when I said you must know how the players make money. If you are using a 10 tick stop you are an 'easy target' for the stop hunters..


Mindset View Post
The issue with taking contracts off before it reaches say the same level as your initial risk is a difficult one.
eg you risk 10 pips and take your first lot off at 5 pips trading 3 lots.

What you have to acquire is the no of times the mfe goes 6 ticks ( allowing for the bid offer spread) in the direction of your trade.
Because at 5 vs 10 even if you win 66% of the time you won't make any money on that lot.
That is NOT a problem if you know that 75% of the time your entry is good for 6 pips.

But then you must also look at what if - what if I just kept my lots on and took the further exit(s)?
I almost guarantee that you will make more money but your win/loss rate will fall and the drawdown's will be larger.

What scaling out does do is reduce the no of outright losses to 'fails' ie you make 5 ticks but lose 10 on the other 2 lots - you have actually only lost 15 ticks instead of the 30 you originally took. ( which is 50%)

It's all a question of balance but one that is statistical - you must KNOW on average " I can expect eg 8 ticks from my trade 70% of the time" and therefore I manage my trade accordingly and keep an eye on the stats to make sure that figure doesn't change over time.

It is simply insufficient to know that you win eg 55% of the time.

And if you spot the error in this post I can go one step further...


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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)
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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

La lucha es de igual a igual contra uno mismo
The fight is fair against oneself
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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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