I'm struggling to get my head around why trading multiple lots is an advantage over trading 1:1. The only thing I can see is that it gives flexibility when exiting a trade, but I can't see how this is a particular advantage.
I asked protradered the question on another thread. He replies....
The following user says Thank You to martifc for this post:
A first target that is set ‘nearby’ is essential to this strategy. It should make sense that the closer a target is to the entry price, the greater the probability that the objective will be hit. From a psychological standpoint, a trader will often times view this as a winning trade which leads to a better state of mind when considering subsequent positions. Practically, this first target can ‘pay for’ all or part of the trade. If the first target equals the total stop amount, the trade is essentially riskless when the first objective is met. Even if the first target is only a fraction of the total stop, the risk will be reduced significantly when the objective is met.
To better improve the risk/reward probabilities of this method of trading, we can trail the stop on the second lot. Therefore, when the first lot meets its first objective, the second lot’s stop is moved up to break even which locks in the gain and guarantees that profit. This one step can dramatically alter the performance of a strategy and boost a trader’s confidence. When the first target has been met, the worst that can happen from that point on is the second lot retraces to the breakeven point and the trade is closed out for the net profit on the first lot. For strategy performance this will naturally increase the ratio of winners (though it could also lower the average size of winners and increase the average size of losers depending on the size of the stops, first target and second target). Applying the two lot method, and the trailing stop for the second lot, to our RSI strategy; we can see a dramatic improvement in performance.
The greater potential from adjustable stop is seen in trader psychology. Emotions often get in the way of a successful trade whether a strategy is discretionary and placed by hand or mechanical with orders automated. Often times, when a trader creates a strategy, they will either place a target too far (in compensation of high risk or to satiate greed) or too close (in fear of a reversal). When using a two-lot system, the burden of turning a profit or avoiding risk is lessened. After the first target is reached, the trader can be more aggressive on the second objective and choose that level more objectively.
The following 6 users say Thank You to redratsal for this post:
I do this and find this statement true - but only for a trade in which I intend to enter early in a trend and hang on until its shot . For scalping it hasnt benefitted me at all since when I play a couple lots , enter/exit at swing points , take a little off or move the stop in the market takes me out on the last lot(s) with little to show for it if anything . You need to trade multiple lots for a swing trade to reduce exposure/risk and capture profits or at least I do and it works fine .
The following 6 users say Thank You to Eric j for this post: