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Before I start - below, I use the word "system" because that's my
orientation but I don't necessarily mean a mechanical system. What I
really mean is a method that has some sort of rules you follow. It could
just as easily be a discretionary method.
IMHO, there are good points and bad points to trading multiple
contracts. The good is that you MAY get diversification and a smoother
equity curve trading 3's. What you are really doing is trading 3 systems
on the same security. Instead of using the same system or method on
multiple securities for diversity, you are diversifying your methods on
a single security.
Let's say, just as an example, you enter long with all 3 at the same
time. The initial stop on all 3 is below a recent swing. You have a
small profit target on the first - maybe just enough to cover slippage
and commissions for the 3. When that is hit, you move your stop on the
other 2 to breakeven and now you are playing with other people's money.
The target on the second is larger and is some price you expect reach.
Maybe a swing high or whatever. You trail a stop on the third hoping to
hit a home run.
Now imagine opening 3 accounts and trading a one lot of each of the
systems (exit methods) in each account. This would give you identical
results to trading 3 in a single account. One of your accounts would
have frequent small winners and an occasional bigger loser. One would
have occasional huge winners. One might be somewhere in between. So
you've got diversification and that's good. Maybe one of the accounts is
losing money at a given moment but another is making money. Some time
later, a different account starts doing well. This is a comfortable way
to trade because something is usually working. As well, you have
frequent small winners to keep your spirits up.
BUT, each of your 3 accounts must be able to stand on its own merits. If
you trade your 3 accounts for a year, you might find that one of them
has grown huge and another is almost broke. Back to the drawing board.
Time to rethink the method in the account that lost money or didn't grow
as much as the others. If all the accounts made about the same amount at
the end of the year, fine, keep trading them all. If only one of the
accounts grew, then you'd better move all your money into that account
and just trade that method. Forget the other 2 that didn't pay as well.
In summary, trading 3 is good if all three methods make money over time
with reasonable drawdowns. Otherwise, you're better off just betting the
farm on the method that works best and forgetting the other 2.
Postscript - I took a daytrading course from a "guru" who has since
retired. I learned a few things and I don't really regret the $300/month
I spent for 2 months of training. He advocated trading 3 contracts. I
asked him the simple question, "what portion of your profit comes from
each of the different exits?" He could not or would not give me an
answer and I found that strange. All he would say is you MUST trade 3.
So, while I believe that the guru believed in what he said, and he could
give sound psychological reasons why it was more comfortable to trade
that way, he was not able to back it up with numbers. He could not prove
that it was actually more profitable or reduced drawdowns.
That's what planted the initial seeds of doubt (wisdom :-). The final
straw was that I was never able to find any of his students who had seen
any proof that he actually traded or even made his calls realtime. He
sent his "lessons" after the market closed for the day so the trades
could have been faked. I'm not saying they were but they could have
been. He would never show an account statement. One student offered him
a large sum of money to watch him trade realtime and he refused. One
student offered to set up an IRC channel so he could post his trades
realtime. He refused.
So, when someone says you must do things a certain way, I say show me
the numbers. Not "I made more than you" numbers. Rather, numbers that
show how much each of the different methods (contracts) contributes to
the bottom line.
School-of-hard-knocks-ly,
Dennis
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