Sunday, February 13, 2011

Small Lot Traders Unite

On Friday I had a conversation with one of my subscribers and it brought to light again the struggle that small lot traders face on a daily basis.

I thought it would be a good idea to write a blog post with the hopes that in the comments section those of you who trade small lots could "compare notes" and discuss what works best for you in terms of managing your trades.

A while back I did a survey and one of the questions I asked was how many contracts do you trade? The reason I put 1,2,3,4 or more than 4 is because once you are able to scale in 1/4's or 1/8ths it makes managing the trade that much easier and size, as far as scaling goes, becomes irrelevant. It doesn't matter if you are trading 4 contracts or 48 contracts your exit strategy can be the same.

For each trade that I put on in the Intraday Alerts you can count on having 4 good spots to scale out. Sometimes I will scale in 1/8ths but really that just gives added flexibility. The goal of every new trader should be to build up their contract size to be able to scale in 1/4's as quickly as possible.

I have often said that you don't increase your earnings in trading by trading more or booking more points - you increase your earnings by hiring more employees (adding more contracts). Once you are consistently profitable with a 4 lot then it is easy to increase size and be profitable with an 8 lot, or a 24 lot, etc.

But this blog post is for those who trade 1 - 2 lots. Even the difference between trading 2 lots vs 1 is paramount. With one lot you are all in or all out. Period. With 2 at least you can book something and still leave on 1 contract for a potential runner. If you are trading 1 lot, and profitable, I would encourage you to up your contract size to 2 immediately.

A typical scenario is a trader with a small account and only trading 2 contracts. Considering I give 4 good places to scale with each entry in the Intraday Alerts how do you manage that if you are only trading a 2 lot?

You have a few options:

A) You can scale 1 C at 1st scale target and then immediately move trade to + 1 and then trail the 2nd contract with the objective of trying to get a runner.

B) Scale 1 C at first target and move stop on 2nd C to make trade a scratch if hits. So if first target is + 13 ticks then you move stop on 2nd C to - 12 ticks, etc. Then when second target hits you move stop to + 1, etc.

C) Don't take scale target 1 but instead scale 1 C at 2nd target and then move stop to + 1 and trail last C for a potential runner.

D) Scale 1C at target 1 and 1C at target 2 and be done.

E) Play hit and run and scale both C's at target 1.

F) I am sure there are many more - post your small lot strategy in the commments!

There are a lot of options but frankly I don't know what works best because I am not in that situation. And obviously results are going to vary over time. That is the point of this blog post to get you guys talking about what DOES work best. So in the comments feel free to post your small lot strategy, or the struggles you face trading small lots, and hopefully we can get a good conversation going with expertise from those in the know - the small lot traders!

I know that I have some subscribers who have had considerable success trading small lots and I am hoping that they will offer their advice and expertise in the comments as well. Thanks all!


Matt said...

After being a subscriber for a couple months, I think it is important to leave a runner for atleast the 3 rd scale. Although Tony is very accurate, he is human. He will have days where I may have a few losers and how he still can end up profitable is leaving those runners. I did the first and second scale and seemed to be inconsistent. Lastly, I started using the mini 6e which allows me to use the 4 scale approach with my account size. This could help some on that contract. My experience is that a runner is needed in most situations.


jmill said...

Thanks again Tony for your time and input.I will be trading sim on Monday and taking every trade called.I plan to to trade 2 lots and implementing option B.

veenmr1 said...

After some frustrating experiences with trading one-lots and a few bad experiences with oversized risk I have taken a step back by only trading the smaller contracts M6E QM QG MGC QI instead of the full contracts 6E CL NG GC SI. This has allowed me to use a scaling-out strategy in cases where in the past I would have been stuck with one-lots in order to keep risk acceptable. I obviously end up paying more in commissions but this is a drop in the bucket compared to the benefits of being able to scale into and out of trades.

Jeff Carroll said...

I'm within my first year of trading, and, when I began, I started trading 2 lots via simulation. I would scale out of my first contract at 2 points (or less if I saw something I didn't like) to lock in profit, move my stops, and continue to work the second lot for as much as possible. I wanted to learn how to work a scaled out trade.

But when I was ready to go live, I moved to 1 lot so that I could gain confidence putting on trades in the real world without losing too much when wrong. I didn't trade this way for long, but it kept me safer while I learned the mechanisms of real-world (instead of simulated) entry.

Also, and I believe this is absolutely necessary, I continued to mock trade the second contract while I was live. In other words, I still locked in my first contract profit, but then monitored the market and simulated the second contract.

I agree wholly with you. Success is about becoming consistently profitable, then adding size.

Diego said...

I've had bad experiences at times trading one lots because of risk and the inability of been able to scale. I wasn't aware of the M6E, i may start trading this now to understand the concept of scaling in and out of trades.


Ross said...

As a small trader, the most important factor for developing your scale strategy is your expectancy. If your losers are nearly equal to your winners, you need to do better than 50/50 to be profitable. Take the Dow mini. If I trade two lots and risk max 15 ticks/contract w/ staggered stops of 10 and 20. My first car needs to scale at least 12 ticks. The second one at least 20. If you're 50/50 that schema provides a small theoretical edge to scale up from.
Expectancy is a key factor for risk management.

Matt said...

I agree that expectancy is everything and I keep track of that. With regards to MGC, there seems to be some slippage that so that is worth watching when near targets or stops.

Jason Gitter said...

When I first started trading I would scale in thirds. On the ES +1, +2 and then a runner. what I found was that even when I got the runner I was not netting a nice profit b/c of the scaling. I no longer scale out for profits. I do however trail my stop up a bit as targets are hit. I will never move a stop above a break even point, as I feel you need to be confident with your entries and targets and give your trades a chance to work. I will take small losses and Break even trades all the time but my winners, b/c I don't scale far out way my losers. My advice is dont be to quick to book a small profit just for the sake of booking a profit. Let them run and you will be rewarded.

Casey said...

My strategy has been 2 lots, take first profit scale, and move stop to +1 for hopes of a runner.

My struggle there has been moving that stop around too much and not actually letting it sit for the runner, and many times taking less profit than the first scale. But this is my own psychological issue.

I would also really like to hear from the smaller size traders on how they are using stops on trades that are going against them.

Are you following Tony's trades verbatim? Reason I ask is, it's tough to put a 20-30 tick stop on say GC when trading a smaller account. What do you do to determine your own risk parameter for a loss?

Matt said...

Casey, on trades where Tony may have 2 entries I either take as two trades if wide enough for stop in between or take second entry. Granted you have to be ok with letting some winners go but in the end you are managing risk better. I had big run up in my first month and then gave it back on a couple bad scale in entries, so now I follow one of these two. Today, 2-14, I got stopped on BIL above highs for small loss in GC. Tony let his play out for winner. I can handle that loss and easily make it up, but if I had added as he did and he got stopped I would have been in world of hurt. So I have just learned to put stop according to my risk and hope/know my hit rate will be above 50%.

TraderSmarts said...

I am really liking the comments and hopefully it is helping out some small lot traders. The objective is to get the conversation going and share ideas!

So far it sounds like using the mini contracts is a viable alternative that enables smaller traders to be able to scale more efficiently.

My concerns would be liquidity, but it sounds like that is not an issue, and commissions, but according to @veenmr1 the benefits outweigh the extra cost.

Another thought is that using the mini contracts will also help you manage risk. Casey talks about it being tough to put on a 20-30 tick stop in the GC with a smaller account. I wonder if the same trade in the YG would better fit your risk parameters and account size?

Keep up the excellent exchange of ideas...

Casey said...

@Matt. Great example on the GC trade for today. I went through the same thing, and was stopped out at the new high, and didn't feel comfortable adding to the position.

My feelings were the same that if I add, and the trade ends up no good, I will be in a very bad spot. On the other hand, I also feel the hurt when I stop myself out, and the trade ends up turning a good profit, like it did today in both GC and CL. Again, this is just my own mental struggles right now.

Matt said...

Does anyone use YG? Seems to be illiquid. I you M6e and it is fine for me. Just curious

I-Man said...

Even tho this is an old school thread...

I will throw a comment in because I just found this place.

I only trade 1 lot YM, I have been doing this since last June.

I tend to move my stop to protect 10 ticks when I have it.

If I have already done this a few times, and am up over $100 or so, I may relax, and protect 5 if I am up 10.

My rationale is, it is my job to take profits, because I trade my firms money.

I will never get blown out, or end up with big down days if I follow this strategy.

With a little luck, I am up 20 ticks even with that stop protecting the 10. Then I'm protecting that.

I would always rather be out of a trade with an actual profit and looking for a new entry into the move, than watch an over 10 tick gain turn into a flat, or worse, a loss.

For me, that is more painful than taking a loss out the gate.

If that happens, its a no brainer, bad trade. Move on.

If I was right, but still lost money, or didnt bring any home, then thats a problem.

All this being said, I am a very modestly profitable trader.

My bad days used to be down $200. Now my bad days are up a bit in gross, but negative or flat in net.

So I pay for my trades if I'm not trading well, provided I stick to the things that got me to this point.

Just so folks know they arent reading a pro or anything.

Sounds like some of yall are swing traders as well, and not just daytraders.

My firm doesnt let us hold overnights, so thats an easy one for me right now.

I'm sure I'll have to relearn a lot of things in the context of swing trades.

I want to be a successful daytrader before I move onto bigger swings.

Côté Soleil said...

My 2cents on trading QM vs CL:
I have been testing this for 2 days only (sim trading), trying to trade 2 contracts on QM vs only one on CL. Trading one lot on CL always brings the question do i take my profit on first target (which is next TS #) or try to push further. There is almost always a pullback on TS#, so i risk losing my profit. Using QM, for the same risk, i can split my trade in 2 and so take profit on 1st target and leave a runner. So i use the CL support/resistance numbers and draw them on my QM chart. In order to get the same kind of chart, i compare a CL 1800 tick chart with a QM 60 tick chart (i use mostly yick charts), because of course QM has far less volume. But at this point the 2 charts look alike. The indicators are less in sink but give roughly the same picture. The numbers in CL and QM are not exactly the same, so i have to round them off on QM. So what did i notice ?
Well the TS support and resistance numbers seem to work fine, if you are not finecky about one tick (i'm not). QM moves slower, so entries usually take longer and i sometimes don't get filled unless i manually enter. Same for targets, i would put them 1 tick before TS#. QM lags CL, but could that be used as an advantage ? Also QM seems to be less prone to spikes, you know the ones deliberately taking out our protective stops... that's it for now.