Determining when to add contracts

[logic_man]

Say you've determined a threshold for adding contracts as your account size grows, but you want to optimize the timing, i.e. you don't want to just add on the next trade after your account reaches the threshold because you don't want to be adding just when you are about to have a losing trade.

Is there a analytical way to determine the optimal number "n" where "n" is the number of trades AFTER your account reaches the threshold, to add contracts?

I'm thinking something based on winning percentage (1/win%?) and probability of the next trade being a losing trade might be useful, but maybe the whole idea of optimizing "n" is fallacious to begin with because of the gambler's fallacy.

 

[wrbtrader]

Quote from logic_man:

Say you've determined a threshold for adding contracts as your account size grows, but you want to optimize the timing, i.e. you don't want to just add on the next trade after your account reaches the threshold because you don't want to be adding just when you are about to have a losing trade.

Is there a analytical way to determine the optimal number "n" where "n" is the number of trades AFTER your account reaches the threshold, to add contracts?

I'm thinking something based on winning percentage (1/win%?) and probability of the next trade being a losing trade might be useful, but maybe the whole idea of optimizing "n" is fallacious to begin with because of the gambler's fallacy.

Why not just keep it simple via using the exact same parameters you have prior to your account growing in reference to the original parameters you used after you first open your trading account.

For example, lets pretend you're trading futures and you're trading 2 contracts with a 50k account. The 50k is the opening account balance when you first open the trading account and the 2 contracts is what you originally decided will be the best fit into your trade management profile involving position size.

Therefore, if you make 25k in profits...you can add 1 more contract or if you make 50k in profits...you can add 2 more contracts.

Also, I don't think anyone should be adding contracts unless the account had grown from trading profits. Thus, using my same example above...if someone sent their broker another 50k to bring the account total to 100k...they shouldn't be trading with 4 contracts. Instead, they have a new "threshold" as 2 contracts per 100k.

Yet, for most discretionary traders (those not using an automated trading system)...adding more contracts after profits have become consistent is a major psychological barrier. My point is this...no matter what type of analytical equation you use...the optimal number "n" will not be able to resolve that psychological issue that most discretionary traders will face when its time to add contracts. Only the few of those that are consistently profitable will be able to get beyond that psychological barrier regardless to what analytical equation is used.

Mark

 

[Specterx]

Quote from logic_man:

Say you've determined a threshold for adding contracts as your account size grows, but you want to optimize the timing, i.e. you don't want to just add on the next trade after your account reaches the threshold because you don't want to be adding just when you are about to have a losing trade.

Is there a analytical way to determine the optimal number "n" where "n" is the number of trades AFTER your account reaches the threshold, to add contracts?

I'm thinking something based on winning percentage (1/win%?) and probability of the next trade being a losing trade might be useful, but maybe the whole idea of optimizing "n" is fallacious to begin with because of the gambler's fallacy.

The idea that you can predict when the next losing trade is "due" is false, unless it's based on something concrete (e.g. you have a high probability of taking losses in the current market conditions). Obviously if you could predict wins and losses with that level of precision, you would incorporate that information into your trading strategy. I don't take trades when I expect to lose.

If you want to be superstitious then wait for a decent-sized drawdown to add cars, or wait until you have a buffer in your account balance (e.g. if you're doing 25k per car, add a second car when the account reaches 60k rather than 50k - you've now got a 10k buffer).

If you have an edge the barrier here is psychological rather than anything real, the first few days/trades on a new bigger size can be nerve-wracking but you quickly adapt.

 

[Handle123]

Another point, don't let profits be the reason of increasing size, just cause you are making money, doesn't mean you are improving as a trader. I see way too many folks keep increasing size cause the account is going up and of course at worst time with most contracts, all the excitement you get slammed with major drawdown and now you are worst off than when you first started as far as believing in yourself. I use to never allow students when I taught to increase by money size, when I saw they were fighting to stay profitable each day and for every $12,000, they could increase a ES by one contract. Some would say very conservative and it should be, no rush to end in the hole bad. Have to trade like you don't need the money, slowly, watch equity curve daily, if you have a bad day, the losses can't be over 3% of the account so you always have a tomorrow.

When you trading well, go with the flow, when you not trading well, cut back size.

I am very very conservative when I day trade, I have a consistent goal, in ES it is 2.00pts, when I make that, I cut back size 85%, this amount varies as time of the year and how I am doing, but once I make my goal, I reduce, want to continue to trade but at a much less stressful way plus if I hit a loss or two, don't want to lose any part of what was locked in on the 2.00 pts.

 

[logic_man]

Quote from wrbtrader:

Why not just keep it simple via using the exact same parameters you have prior to your account growing in reference to the original parameters you used after you first open your trading account.

For example, lets pretend you're trading futures and you're trading 2 contracts with a 50k account. The 50k is the opening account balance when you first open the trading account and the 2 contracts is what you originally decided will be the best fit into your trade management profile involving position size.

Therefore, if you make 25k in profits...you can add 1 more contract or if you make 50k in profits...you can add 2 more contracts.

Also, I don't think anyone should be adding contracts unless the account had grown from trading profits. Thus, using my same example above...if someone sent their broker another 50k to bring the account total to 100k...they shouldn't be trading with 4 contracts. Instead, they have a new "threshold" as 2 contracts per 100k.

Yet, for most discretionary traders (those not using an automated trading system)...adding more contracts after profits have become consistent is a major psychological barrier. My point is this...no matter what type of analytical equation you use...the optimal number "n" will not be able to resolve that psychological issue that most discretionary traders will face when its time to add contracts. Only the few of those that are consistently profitable will be able to get beyond that psychological barrier regardless to what analytical equation is used.

Mark

I agree with you that the only rational reason to add contracts is due to equity growth, not simply pumping more money into the account. Everything I do is completely rule-drive, so for me the big thing really is trying to figure out that "n" and just trade the n-th signal as I would the n-1 signal, just with more contracts on the trade.

 

[logic_man]

Quote from Specterx:

The idea that you can predict when the next losing trade is "due" is false, unless it's based on something concrete (e.g. you have a high probability of taking losses in the current market conditions). Obviously if you could predict wins and losses with that level of precision, you would incorporate that information into your trading strategy. I don't take trades when I expect to lose.

If you want to be superstitious then wait for a decent-sized drawdown to add cars, or wait until you have a buffer in your account balance (e.g. if you're doing 25k per car, add a second car when the account reaches 60k rather than 50k - you've now got a 10k buffer).

If you have an edge the barrier here is psychological rather than anything real, the first few days/trades on a new bigger size can be nerve-wracking but you quickly adapt.

I see what you are saying about predicting the exact outcome of the next trade being an unrealistic expectation. I'm more thinking of it in the context of adding contracts over X (hopefully many) number of times reaching my threshold and if there is an equation that says that "on average" it's best to add after "n" trades if your winning percentage is y%, knowing that averages are just that and that there's no way to add at just the right time before a nice winner every time.

Just seems like the sort of thing that someone would have figured out.

 

[logic_man]

Quote from Handle123:

Another point, don't let profits be the reason of increasing size, just cause you are making money, doesn't mean you are improving as a trader.

True enough. I think we've all had streaks where it turns out the market was just lending us the money and had no intention of letting us keep it.

 

[Specterx]

Quote from logic_man:

I see what you are saying about predicting the exact outcome of the next trade being an unrealistic expectation. I'm more thinking of it in the context of adding contracts over X (hopefully many) number of times reaching my threshold and if there is an equation that says that "on average" it's best to add after "n" trades if your winning percentage is y%, knowing that averages are just that and that there's no way to add at just the right time before a nice winner every time.

Just seems like the sort of thing that someone would have figured out.

Well, it's similar to trying to calculate "maximum theoretical drawdown" or some such - you can figure the odds of taking X number of winners or losers in a row, and use this information to say "well, now that I've had X losers I'm 'due' for a winner." But statistically this makes no sense, because each trade is (supposedly) independent.

My suggestions:

1) Add after a significant drawdown (significant being up to you). At the very least it's a psychological exercise, you are demonstrating to yourself that you have confidence in your system and will redouble your efforts to trade well - plus you don't psych yourself out about adding at the peak. As a bonus, when your trading does turn around it takes less "effort" to make a new cash equity high (you may have drawn down 20 points, but it only takes 10 to recover on the larger size).

- or -

2) Decide what leverage ratio you're using (e.g. 10k or 20k per car) and add whenever you reach these thresholds, plus a buffer (e.g. if 10k per car, add a 2nd car when you hit 25k, 3rd at 35k etc.).

 

[Ghost of Cutten]

Optimal position size is determined by only a few factors:

1. How much you are willing to lose
2. The risk inherent in the trade
3. The trade expectation (win rate and reward/risk ratio)

Nothing else has any input into what size you should trade. If you know those 3 factors, then with a bit of basic arithmetic you will be able to deduce your optimal size. If you don't know all those 3 factors, you have no business placing the trade in the first place.

 

[murray t turtle]

Quote from logic_man:

Say you've determined a threshold for adding contracts as your account size grows, but you want to optimize the timing....

Yes, Trend Logic;
slower is better for sure . Thats easily proven with all [and high %%]t of the new/somewhat new traders that do the opposite & blow up.

Actually its more helpful to cut back if you dont like the trading/investing account TREND.

I like the warning/story thru Mint trading, his relative had made almost 100k, buying options if i remember it right-''never cut a loss''. Mint manager warned, warned him about that.....................

Not really long after that, that option trader not only blew his account;
but owed the bank $10, ooo or so, adding contracts..................