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Trading Multiple Contracts

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Depending upon the market being traded, day traders either trade futures contracts, shares, or forex lots. The minimum trade size is usually one futures contract, one hundred shares, or $25,000 (or the equivalent in another currency). For ease of understanding, I will refer to futures contracts throughout this article, but you can substitute this with groups of one hundred shares, or with forex lots, according to the market that you are trading.

Single Contracts

Beginning day traders usually trade the minimum size of one contract. Initially, this is a good idea, because it allows new traders to trade with the lowest amount of capital at risk, and gives them time to become comfortable with their trading before adding the complication that comes with managing multiple contracts. However, more advanced trading systems may have been designed for multiple contracts, and will not perform as well when traded with only a single contract.

When trading a single contract, the only type of trading that can be performed is all in all out trading. All in all out trading means that their is one entry and one exit, and the entire trade size is entered and exited together. An example of all in all out trading would be scalping (very short term trading) where the entire trade is entered and exited within a few seconds.

Multiple Contracts

Professional day traders usually trade multiple contracts, which is often from two to twenty contracts, but could be more if the market being traded is liquid enough (i.e. has high enough volume).

The main reason for trading multiple contracts is to increase the tick value of the market thereby providing more potential profit. For example, the DAX futures market has a tick size of 0.5, and a tick value of 12.50 Euros. This means that for every 0.5 change in price, a trade's profit or loss changes by 12.50 Euros per contract. By trading three contracts the tick size remains the same, but the tick value is increased to 37.50 Euros, which triples the potential profit and loss for the same trade.

The other reason for trading more than one contract is to allow more advanced trade management. In addition to all in all out trading, multiple contracts can be traded using a variety of different strategies. For example, a multiple contract trade could be all in scale out, scale in all out, or scale in scale out, as well as many other combinations of entries and exits.

Multiple Contract Strategies

A popular multiple contract strategy is a variation of an all in scale out strategy, where the majority of the trade is similar to a single contract trade, but adds a single contract as a runner (i.e. a contract without a specific target):

  1. Enter a trade with two contracts
  2. Wait until the trade reaches its usual profit target
  3. Exit one contract, and move the stop loss to break even
  4. Wait until the trade continues into profit or reverses to the break even stop loss
  5. Exit the second contract for a larger than usual profit, or for break even

The advantage of this strategy is that the basic trade is the same, but the additional contract can take advantage of any larger than normal price movement. For example, if a trade has a target of 5 ticks, but the price sometimes moves 80 ticks, the second contract would be available to make anywhere from 5 to 80 ticks additional profit.

A more complicated multiple contract strategy can be traded as either a scale in scale out, or scale in all out strategy, and can also have a runner to take advantage of any unusual price movement:

  1. Enter a trade with one contract
  2. Wait until the trade has moved into profit by a portion of its target
  3. Enter a second contract, and move the stop loss to break even
  4. Wait until the trade reaches if usual profit target
  5. Exit both contracts
    Or
  6. Exit the first contract, and move the stop loss to the second contract's break even
  7. Wait until the trade continues into profit or reverses to the break even stop loss
  8. Exit the second contract at its usual profit target, or for a larger than usual profit, or for break even

The advantage of this strategy is that the risk of the trade remains the same as a single contract trade, but the potential profit is increased. For example, if the trade is stopped out (i.e. the price reaches the trade's stop loss), the trade will only experience a loss with one contract, but if the trade is profitable, the trade will make profit with more than one contract. This multiple contract strategy can significantly improve the risk to reward ratio of a trade without changing the original trading system.

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