MULTILOT TRADING

Putting on more than one lot is a milestone in the evolution of the trader. Multiple-lot
trading provides enormous efficiency for the same effort. But it comes at a price.
The risk of quick and large drawdowns is proportionally greater. Multilot trading becomes
a double-edged sword. The new trader needs to learn how and when to put on
multiple lots.
The first rule of multiple-lot trading is the rule of three. Each trading decision can be
broken down into three components:
1. Financial
2. Technical
3. Psychological
All three converge to trigger a trade. The trader makes a financial decision on how
much to risk. At the same time, there is a technical decision on quality of the setup. Finally,
there is an unquantifiable factor on whether the trade feels good. It is very difficult
to quantify how each component contributes to the final trigger of the trade. Because it
is impossible to separate these three factors, the best approach by a trader is to think of
three lots as the best way to trade multiple trades. Each lot, in a sense, serves a different
master. The first lot calibrates with the financial objective of the trade and would get a
limit of the average goal per trade of 15 pips. The second lot would be aligned with the
technical aspects of the trade and get a limit that is related to the range. It would be more
than the first and would be designed to capture more profits. In other words, if the range
is 50 pips, the first lot is always set at 15 pips, and a second lot is set at 40 pips (just short
of the other side). The last lot becomes the wild card—it serves the psychological needs
of the trader. You can decide to have a very large limit, such as 70 pips or more, or even
leave it totally open. The effect of this approach is that when three lots are put on, the
trader will be able to manage the trade without overreacting to the market. The fear of
missing a big move is eliminated.
The challenge becomes identifying when to put on multiple lots. When do you put
on more than one lot. How do you differentiate between conditions that justify two lots from those that justify three lots? The multilot decision should not be an arbitrary one.
While there is no rule set in stone on this issue, an effective approach that has worked
very well is the confidence indicator. The purpose of the confidence indicator is to be
able to determine when to put on multiple lots. Each trader should develop his or her
own confidence indicator. It is not difficult, but it becomes a powerful way to improve
trading.
The process is straightforward. For each trade setup that the trader is using, the
trader should assign a number from 1 to 5 (5 being the highest rank). If the trader sees
a setup that has many elements of confirmation, then it gets a 5. An example would be a
setup that has Fibonacci levels at resistance or support, the price is probing the Bollinger
band, there is alignment with the trend, and so on. The 15-minute and 5-minute setups
are similar and supportive of the trade. This deserves a 5. If the trade setup generates
a feeling of high confidence with good features, but not the best, it gets a 4. A 3-ranked
setup is one that the trader has a “hunch” about. Maybe it will work. It may be a guess. A
2 ranking is one where there is divergence and the situation appears to be not tradable.
It may be a narrow range, or the price may be in the middle of a range. A 1 is the lowest
ranking. A ranking of 1 represents conditions that experience shows are very dubious for
a successful trade. A ranking of 1 results when the trade is countertrend and when the
indicators are not agreeing with the trade, showing divergence.
The idea is that, over time, by ranking each trade that is about to happen, the trader
will be able to have a strong correlation of the confidence index with profitable trades.
As traders become more experienced, more of the profitable trades should consist of
higher-ranking setups such as a 4 and a 5. In the beginning, during your first 50 trades,
many of the trades are hunches. So the distribution of winners should, over time, be with
highly ranked trade setups. During the first 50 trades, many losing trades would consist
of high-ranking setups, which is an indicator that the trader is misevaluating the trading
setups. If a large number of the winning trades are ranked 3 as hunches, consider yourself
an intuitive trader and keep doing what you’re doing!
Using your own confidence indicator ranking system provides a powerful tool for
self-improvement. Traders who experience a series of losses and then go back and review
the trades in terms of their rankings will more quickly perceive what the nature of
the error was. Having an archive of your trades ranked by confidence levels becomes
the equivalent of having a snapshot of your thinking right before a trade. A key tool is
to take an image of the chart when you put on the trade and place the ranking on it.
Using the “print screen” function achieves this capture. A very good and popular software
tool to do this is SnagIt (available at www.techsmith.com). Take a snapshot of your
next trade, and rank it right after you put on the trade. Then evaluate your own ranking.
Did it deserve the number you gave it? Over time, your ranking criteria will also
improve.

Here’s an example: Early on the morning of February 28, at the opening of the
London session, a high-confidence setup was observed (see Figure 15.1). Evaluate this
setup. We see the price probing an upper band. We see the Williams %R indicator pointing
down, and we see a reversal in the renko blocks. This was a nice 4 rating (in my mind)
and it fit the criteria for a multilot trade worthy of two lots of USDJPY for a Sell@118.57.
Placing a stop order for 118. 36 (not quite twice ATR) and one limit of 20 pips for the first
lot, the second lot would have a limit of 30 pips. Both objectives were met within a short
amount of time.

By Abe Cofnas