Trading Size

[Bfbusa 10]

Here is something that has been rolling around in my head for some time.

 

We always hear that we should always trade a size ( number of contracts) that we feel comfortable with. Which really translates into how much are we willing to lose on a given trade, so we keep trading and we keep losing because we a comfortable.

 

Think to yourself, if you had twice or three times your normal size, I bet you would be darn well sure that the setup you take is the highest probability in your arsenal. You may find yourself not over trading and being alot more disciplined. (Of course you must have a solid trading plan and good setups first.)

 

Crazy, I know, it flies in the face of what we are taught to do as Traders.

 

So think about it for a second.

 

And Let The Debate Begin.

[brownsfan019 17]

Interesting post bf. Good points. Assuming you are confident enough to trade your methodology w/o hesitation, there is a strong argument to trade larger that's for sure. Now, here are the 'assumptions':

• You know your system makes money.
  
• You have tested, tested and tested just to make sure your analysis is correct.
  
• You can execute w/o hesitation.
  
• You can leave the emotions out of this. Probably the hardest one if you increase your size.
  
• And lastly - you are 100% confident in your system!!!
  

Assuming all of that, I could agree with increasing size to bring your focus in even more and increase your returns quicker as well. More money is always a good thing.

 

I would also add to the mix - if you can operate under these conditions, there's really no need to keep much extra cash in your account. Since futures brokers don't pay interest on cash (unless you put in T-bills), the argument here could be to keep that excess cash in something more liquid that pays you something.

[dalby 10]

also, emotions aside (which are a big reason not to increase size), even a cursory understanding of game theory/probability shows that larger size EXPONENTIALLY increases risk of ruin.

 

iow (it depends on expectancy of your methodology but generally speaking), doubling your size can result in FAR more than a doubling of the risk of ruin.

 

i look at it this way. size is something you EARN. just cause you have a 100k account does not mean you should trade 50 dow contracts

[walterw 10]

Volume should not change your feelings... you have to be equally responsable and commited if you trade 1 or 50 contracts, if the correct actitude, trading more contracts is just a matter of money management... feels the same like when you started with 1 contract.... you need a decent aproach, clear and easy.... plus discipline and optimism, specially when you get stoped, have a good RRR embeded on your aproach, the rest is story... no matter how many contracts.... on my experience, trading more contracts was obviously a sintom that my trading aproach was correct, giving me more confidence on my career... but it did not make me dissy or less responsable.... cheers Walter.

[BlowFish 10]

The point is you should be pulling the trigger to get in and get out almost without thinking. The more you have on the line the less likely you are to be able to do this. Whether your base unit it is one lot or one hundred lots you should folow the system in the exact same way if you do not you should probably stop until you figure out why not.

 

Think of the largest drawdown you have had recently. It is quite likely to be 5 or maybe more losers in a row (depending on what sort of % winners : %losers your aproach has). If that string of losers produced 3 times the drawdown how would you feel? Confident and ready to pull the trigger unemotionaly on the next trade?

 

I recently opened a spread bet account (essentialy allowes you to bet on the underlying market) this allows me to bet $1 a tic essentialy. Funily enough I still make the same emotional errors (closing way too soon) even though the amount is fairly negligible. I know this perhaps lends wieght to your argument However I think the real problem is my fear is of being wrong rather than loosing cash!

 

Try the oposite bet small size on a low value instrument until you can get in and out without any emotional pangs at all!

 

And as was said before really know and understand the risk of ruin. I always am surprised how likely it is even with a reasonably positive system if you use too great a size.

 

Its a risky gambit - literally!!

 

Cheers,

Nick.

[momentom 10]

I used to trade the whole session.

 

Then I did the statistics and found a pattern when I had the best trades. It was really clear. Now I trade ONLY during those windows. And I trade 5 times the size doing fewer trades.

[BlowFish 10]

Momentum sounds like you have found a trade that has a much higher chance of winning and so increased size acordingly. I wonder how much you put at risk on each trade is that 5 times as much?

 

If you can get up above 65% even towards 70% the risk of ruin starts to drop fast. That one of the reasons I would perconaly prefer a 70% method that uses a 1:1 RR.

 

The OP is saying (if I read it right) that if he trades larger size he will find higher percentage trades. You have found a higher percentage trade and so are trading larger. There is a subtle (and imho important ) difference.

 

Cheers,

Nick.

[momentom 10]

I cannot trade successfully unless I have a high percentage win rate - more than 80%. I am unsuited to any other way of trading. The only way I can then earn enough is to trade size on "sure" setups. Each time you trade, you take on risk. So I only risk when the odds are surely strongly in my favour. So I maximise my earning by trading confidently on those "sure" setups. Works for me but may not work for you.

[BlowFish 10]

Momentom thats a far far more comfortable way of trading imho also. It must be very hard to use 'traditional' trend following methods (the turtles method springs to mind). I believe that though profitable (in large due to fairly aggresively adding contracts to winning trades) it had somethin close to 70% losing trades. Sounds like you would not have made a very good turtle I am pretty sure I woud have strugled.

 

As an aside the youngest (and apparently most succesful of the turtles) has written a book. Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders. I hear its a good read if you like acounts of traders and trading (rather than looking for some 'secret' trading method).

 

Of course "whatever works for you" is the sound bite of the day. If you do try Bfbusa it would be interesting to hear how you got on. Just be careful out there .

 

Having got the cliche paragraph out the way, might I ask Momentom roughly what your risk reward ratio tends to pan out at?

 

Cheers.

[Guest cooter]

If you always wanted to know why 95% of futures traders are losers....overtrading and oversizing.

 

Since we are all humans, psychology plays into how we act and react too good and bad trades alike.

 

When you reach your daily trading goal, stop trading. The markets will be around the next business day to do it again.

 

Bad trades can temp you to increase your position to "catch up". Don't do it. Stay the course. If you get 3 or more losers in a row on the same trading day, stop.

 

Simple enough, but it'll keep you in the game with a level head long enough to actually make some $$$ after awhile.

[walterw 10]

If you always wanted to know why 95% of futures traders are losers....overtrading and oversizing.

 

Since we are all humans, psychology plays into how we act and react too good and bad trades alike.

 

When you reach your daily trading goal, stop trading. The markets will be around the next business day to do it again.

 

Bad trades can temp you to increase your position to "catch up". Don't do it. Stay the course. If you get 3 or more losers in a row on the same trading day, stop.

 

Simple enough, but it'll keep you in the game with a level head long enough to actually make some $$$ after awhile.

 

 

Hi Cooter, you know I am actually using daily targets too and I am enjoying this money managment method, it helps you to stay out of overtrading and you walk out with a nice decent fixed dollar amount every day... helps a lot.... cheers Walter.

[Guest cooter]

Hi Cooter, you know I am actually using daily targets too and I am enjoying this money managment method, it helps you to stay out of overtrading and you walk out with a nice decent fixed dollar amount every day... helps a lot.... cheers Walter.

 

Exactly, me too. But some would have you believe that you MUST take every valid trade, every time you see it. Sounds like broker talk to me.

[momentom 10]

Having got the cliche paragraph out the way, might I ask Momentom roughly what your risk reward ratio tends to pan out at?

 

Cheers.

 

My initial stop loss is a drop dead stop loss and is about 2 x my expected initial minimum profit target. Having said that. The "possible" profit target is more than 3X my risk.

 

Once the trade is on, I manage it.

[brownsfan019 17]

Exactly, me too. But some would have you believe that you MUST take every valid trade, every time you see it. Sounds like broker talk to me.

 

I guess I must be a futures broker in disguise then! :p

 

I think the 'take $X dollars per day' talk is great when you are new to trading. That makes sense.

 

However, as you get more experienced and understand that you must strike while the iron is hot, you will see the error in thinking like that your entire trading career.

 

Simply - no trader knows when their setups will occur, when they will work, when they will fail. Knowing that information, you MUST capitalize when your setups are working. As I stated earlier, one day can literally make your month and to say 'No Thanks, I've made enough today' can be very destructive over time.

 

I think too many traders, esp those new to trading, are way to quick to stop when they make a little money and way too willing to keep trading when they are having a rough day. That's a losing proposition no matter how you slice it up.

 

Another way to think about this is to first categorize yourself as a trend trader, counter-trend trader and/or chop trader. Most are one of those three. Since we have NO IDEA going into the day what type of day we will see, you have to capitalize when it's 'your' kind of day. Personally, I need volatilty. I need movements. When the market is chopping around, I'm probably going to lose/break-even that day. On days when the market is really moving, for me to walk away after my first trade provides a nice profit is simply ridiculous and in my opinion a very amateur type move. There can be days where an ENTIRE day can provide NUMEROUS PROFITABLE setups. To just pass on those for no reason, other than b/c you are afraid of losing the money you made, is more destructive than you guys are realizing here. I don't know... perhaps you've never had a day where you made so much money that you could not believe what your P&L was at. And until you do, this will sound like 'broker' talk, but I think it's quite the contrary.

[walterw 10]

Brown : when the day has momentum (very few) Oh Yes ¡¡ I do stay inside with some runners... now on chopy (most of them ) I try to make my day, originally I was on $60 per day contract... now I am on $100 per day contract... on a momentum day normally I exceed the $250 per contract... and yes its more the scalper mentality.... but believe me it pays the bills jejeje... cheers Walter.

[brownsfan019 17]

I thought of another way to explain -

 

It's often said that in order to make money trading, you must have an 'edge'. Assuming that is correct and assuming you are not sure when your edge will in fact be an edge, how can you stop trading your edge b/c of some arbitrary dollar gain? The market does not care if you hit your goal for the day.

 

How many days have you looked at in hindsight and said 'WOW, I would have made a KILLING trading my edge all day!'. Well, if you simply stopped after one trade, that 'killing' is purely a dream.

 

I suppose I am of the belief that you have to take the money when it's their for you b/c there will be plenty of times when the well is 'dry'. That does not necessarily mean you are losing, but let's be realistic - there are plenty of days that not many traders get excited about due to the lack of movements, volume, etc. I would prefer to be in the game when things are moving around and make my money knowing full well there will be times when there just isn't many trades and/or profits.

[Guest cooter]

Brown : when the day has momentum (very few) Oh Yes ¡¡ I do stay inside with some runners... now on chopy (most of them ) I try to make my day, originally I was on $60 per day contract... now I am on $100 per day contract... on a momentum day normally I exceed the $250 per contract... and yes its more the scalper mentality.... but believe me it pays the bills jejeje... cheers Walter.

 

 

Since you trade the ER2, Walter, that was 6 ticks initially, right? Now your target is 1 full point, and sometimes 2.5 points on the Russell on a high momentum day. Not bad, indeed.

 

Just curious, what is your downside limit? When do you say "no mas" to your losers and call it a day?

[brownsfan019 17]

Brown : when the day has momentum (very few) Oh Yes ¡¡ I do stay inside with some runners... now on chopy (most of them ) I try to make my day, originally I was on $60 per day contract... now I am on $100 per day contract... on a momentum day normally I exceed the $250 per contract... and yes its more the scalper mentality.... but believe me it pays the bills jejeje... cheers Walter.

 

Walter - I think it first depends on how you define 'momentum' as I personally think there's plenty of momentum most days. We don't know when that momentum will show up and it may only show up for a few minutes or a few hours, but I do know that when it shows, I need to be in my trades. For example, there can be some great momentum before/during/after econ news and if you can trade during these times, it can provide great opportunities in a very short period of time. It might only last for a few minutes, but there's some serious money exchanging hands.

[brownsfan019 17]

 

Just curious, what is your downside limit? When do you say "no mas" to your losers and call it a day?

 

Cooter - you took the question right of my mouth. Walter, what's your daily max pain setting? Cooter, same question to you as well.

 

Where do you guys say enough pain and stop trading for the day?

[brownsfan019 17]

Brown : when the day has momentum (very few) Oh Yes ¡¡ I do stay inside with some runners... now on chopy (most of them ) I try to make my day, originally I was on $60 per day contract... now I am on $100 per day contract... on a momentum day normally I exceed the $250 per contract... and yes its more the scalper mentality.... but believe me it pays the bills jejeje... cheers Walter.

 

Walter - another question if I may - if your goal is $100/ct and done, how are you sticking around for the $250/ct days? Do you arbitrarily decide to let trades run for the sake of letting them run? To make $250/ct, you are violating your daily goal rule. I'm wondering how one makes the distinction of stopping at $100 or going for that $250, which is more than double your initial goal for the day.

[MrPaul 10]

I'm surprised no one has brought up the issue of position sizing with regard to type of setup. I have about 5 setups I play that range from high probability to extremely high probability. My contract size will be completely dependent on the setup at hand.

 

In my opinion it is disadvantageous to initiate a set number of contracts across a series of day types (low volume/high volume, trending/ranging etc.) and trade setups.

 

For instance capitulation volume into an area of support that formed a very bullish candle pattern would warrant a high number of contracts. On the other hand a counter-trend profit taking scalp would warrant a much smaller position size (due to the lesser degree of probability).

 

What also makes a very big difference is whether you are trading off of market structure or your P/L. If you trade (focus on) your P/L you will exit too soon, if you trade off market structure the contract size does not matter.

 

[brownsfan019 17]

Paul - we had this discussion in another thread awhile ago and myself and few others made the argument that if you have an array of probability trades, why bother with anything other than the most highly probable of producing profits and simply trade large size on these gems?

[Guest cooter]

I thought of another way to explain -

 

It's often said that in order to make money trading, you must have an 'edge'. Assuming that is correct and assuming you are not sure when your edge will in fact be an edge, how can you stop trading your edge b/c of some arbitrary dollar gain? The market does not care if you hit your goal for the day.

 

Exactly. But YOU do, right?

 

Card counters at a casino are said to have an edge, too. But they can't follow their valid setups indefinitely for fear that the casino will shut them down. Just get a reasonable amount, and leave the table, so you can make a go at it again the next day.

 

Same thing here.

 

You take your valid setups and make your money until you reach your goal, if possible. Valid as your setups may be, it's still called trading for a reason.

 

Unless you can detach your emotions from the execution of your trading strategy, your previous success or failure while you're in a trading session could impart a subtle influence upon whether you properly interpret and apply your strategy correctly.

 

If you are saying that you have the "balls of steel" in order to trade like an automation, then your approach has merit.

[brownsfan019 17]

Exactly. But YOU do, right?

 

Card counters at a casino are said to have an edge, too. But they can't follow their valid setups indefinitely for fear that the casino will shut them down. Just get a reasonable amount, and leave the table, so you can make a go at it again the next day.

 

Same thing here.

 

You take your valid setups and make your money until you reach your goal, if possible. Valid as your setups may be, it's still called trading for a reason.

 

Unless you can detach your emotions from the execution of your trading strategy, your previous success or failure while you're in a trading session could impart a subtle influence upon whether you properly interpret and apply your strategy correctly.

 

If you are saying that you have the "balls of steel" in order to trade like an automation, then your approach has merit.

 

I really don't see the correlation between a card counter that can be shut down and a trader that makes money. The CME is not going to call you up one day and tell you that you made too much recently and you are now banned from trading. Nor will the NYSE, CBOT, etc. I understand that FX is a different story.

 

So, really the point you are trying to make Cooter is that since many traders cannot detach their emotions from practical trading mechanics, you must shut yourself off at some point - good or bad. And in theory, I get that.

 

If your edge is truly an edge, then I believe you must exploit it each AND every time it appears b/c you have no idea going into the trade if this will be a winner or not. Since obtaining a 100% win ratio is not likely, you cannot omit any winning trades or your winning % will be drastically skewed.

 

In the end, we are all playing a numbers game here. Going into a trade setup, we know that this has a X% chance of producing a profit. We know that there's no way to be correct all the time, so you better be in the trade when your winners do show up. And if 5 winners show up in one day, you better capture that profit b/c tomorrow is a brand new day and once again, we have no idea what the day holds.

[Guest cooter]

 

So, really the point you are trying to make Cooter is that since many traders cannot detach their emotions from practical trading mechanics, you must shut yourself off at some point - good or bad. And in theory, I get that.

 

Glad to hear that.

 

However, theory is your emotions NOT playing some role in the application of your trading strategy; reality is realizing that there is some psychological component to the proper and profitable recognition and execution of our valid setups and adjusting accordingly.