Trading too many contracts?

Trader's Mindset

Dec 10

Recently, I shared that taking serially correlated losses was one of the primary reasons future traders end up losing their account. In this post, I will explore why that happens.

So, the reason that most traders take serially correlated losses is that they are trying to get into a trade with a just a few ticks of risk and usually with too many contracts. It makes sense in theory to try to trade more contracts because leverage is only amplified across the vertical axis when trading futures.

And, I have seen that to be the case in many cases where I was trading many contracts and managing my risk better then when I traded fewer contracts and didn’t actively manage my risk.

However, the problem is that when trying to manage risk by hopping in and out then the statistics go out the door. You cannot really know how it will work in the future.

And, that is why most professionals do not attempt to manage risk that way. Instead most professionals do trade in a more “statistical” way where they trade fewer contracts and choose logical or backtested stops.

Another thought on my mind– it may not even be needed. For example, let’s imagine you manage to trade just 4 markets and you take only the best 1 to 4 trades per market. So, you’re going to be getting from 4 to 16 trades per day.

And, my point is you’re going to see you don’t need anywhere near 16 trades per day.

Now let’s imagine you could risk just $250 per trade. And, ideally you have a a good win ratio and/or a good return to risk per trade. But, let’s just take a best case scenario that balances both and assume you get a 2:1 return per trade and win 70% of the time.

Your expectancy in that case is $275 per trade and you only need to place on average 2 trades per day to make 100k.

Okay those are very good stats. Let us imagine that you only make a little more then you risk on average, so we’re using a 1.3 multiplier and that you only win 62% of the time. You still only need to make 3 to 4 trades per day to hit the 100k level risking just $250 per trade.

Given the math– why do so many futures traders work so hard to trade a lot of contracts? I can point to a few causes.

  1. The futures contracts are large and it may not be possible to limit the risk to just $250 for any given market when trading statistically. In fact, many systems I developed need $600 or greater stop loss to work optimally. This may explain why the desire to manage micro-manage risk originated. Equity traders could always scale the risk. In fact, it may be a combination of the amount of leverage one could theoretically control combined with rational risk levels that were too large for comfort. It may have originated also before markets were algo dominated and when it was possible to better micro-manage risk through speed of execution.
  2. Some discretionary traders may not have a statistical edge. The edge is often the result of self introspection of ones understanding of the market. If a trader normally doesn’t have a strong probability but rarely gets a strong probability– such as low frequency events– then it stands that one will need to make more from these events.
  3. The desire to make more when one has a stronger edge. This is rational.
  4. The illusion of the risk free trade. This is the idea that one will get into the market and if it doesn’t immediately go in favor then they will cut it.

On the matter of the importance of managing micro-managing contracts, I am still divided because if markets are really efficient then ability to add contracts for rare events seems to be a real edge.

I think it must boil down to (1) accurate reflection of confidence and (2) expert knowledge of how much size and how it can be added. In other words, I think it boils down to whether or not one can really rank their trades and importantly even if one can do that– whether or not it is possible to get into such a trade with a minimal of risk.

Again, what we’re really talking about is that it is possible to lose more even when risking less per trade because the multiple stop outs can increase the loss beyond the a more sensible larger stop. But, it also gets into whether or not adding size should be part of ones arsenal. So, this really gets into whether it is possible to reliably hop in and out of the market with just a few ticks risk.

I’d like to hear your thoughts. Do you think that having a statistical edge or learning to manage contracts is more important for success? If you’re a professional– would love to get your insight.

At any rate, I think I have shown that if one can be consistent– that the ability to load up many contracts is not required.

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