How to add size?

Trader's Mindset

Jun 23

Adding size to a working trade without worsening your outcome is not an easy task. In fact, it is highly probable that one will make a cognitive error without a precise and clear plan on this matter.

Let us examine some reasons one might want to add size:

  1. When there is a larger then usual profit target
  2. When there is a pricing opportunity
  3. When there is a highest probability for the market to continue in favor
  4. When the probability of hitting a target is higher then hitting a stop loss
  5. When confidence or expectation of win is highest

The specific reasoning for adding size can determine the proper action.

One form of cognitive bias that I have seen cause me to swing from large wins to large losses has been counting the open trade profit against my new opens.

This is why I generally do not recommend adding size with the same or like for like instrument. For example, if I have an outright futures position then I do not recommend adding size to it but instead to open a bull spread or bear spread or even use a binary option.

For example, let’s imagine you have 1 E-mini ES with $500 open profit or 10 points profit. You might look at this trade and think, I have $500 to count against any new open. Yes, you have 10 points profit. If you add an additional contract, you will be break-even at however at -5 points. However, if your “read” of the general market conditions is accurate then you risk being driven out of a good trade.

The better solution is often going to be to open a completely risk limited options trade. The one case where adding additional outright contracts can make sense is if you are very confident your trade will go immediately into profit. Importantly, this is a statistical distinction.

Going back to the other scenario, let us the market retraces 5 points, you also use a break even stop at -10 points, and you opened a risk limited options position above the market such as a bull spread. Your max risk on the additional add is completely risk limited. If the market moves against you, you are not forced out.

Below is my expert system that I plan to use as a guide going forward.

Prefer to add using options, bull/bear spreads or binaries, if you are adding because:

  1. Larger then typical profit targets
  2. Generally favorable prices
  3. Generally favorable patterns but no specific catalyst

Prefer to add with outright/futures when

  1. Probability of reaching target before stop loss is statistically favorable
  2. Very high probability of being immediately in profit.
  3. Profit target is modest but high probability
  4. Very specific conditions dictate favorable reward to risk.

Stop attempting to add size after a maximum of 2 consecutive losers, regardless of reason.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at curtis@beyondbacktesting.com.

>