Recently I conducted a survey wherein I asked commodity traders how many markets they trade at one time. The results came back as follows:
Just one: 36%
Less than 4: 41%
Between 5 and 10: 9%
As many as possible: 5%
The results of the survey seem to indicate that most people prefer to trade fewer markets at one time vs. more. I would have to say I agree with that assessment. I have found that for me anyway, trying to properly manage more than three markets at one time is very difficult. Different markets are doing different things, requiring different decisions, all at the same time!
While the number of different markets you choose to trade at one time is purely a personal preference, the problem of trading more markets simultaneously compounds itself geometrically as your trading time frame decreases arithmetically (huh?) In other words, if you have a longer term focus on your trades, it is a little easier to manage more markets than it would be if your trading focus was only on day trading.
For the small trader the difficulty comes not in trading multiple markets, but in choosing the best markets to trade. Many times the small trader will get into a trade only to discover a better opportunity present itself in a different market the very next day. It is very tempting for the small trader to overextend themselves and try to trade both markets at the same time. While it can be done, it is usually a strain on both the trader and their account, especially in the event that one, or both, positions move against them.
Learning to choose the best trading opportunities involves learning patience with the markets. Opportunities abound most days, but not all the opportunities are worth taking. Learning to figure a proper risk/reward ratio is the first step in choosing the best trades. If a market can not at least give me 2:1 risk/reward then I will most certainly pass on the trade. Obviously a better trade would offer even a higher risk/reward ratio.
Likewise if the market requires too much risk, or demands me to place more at risk than I am comfortable with, I will pass on the trade. Many traders fall into the trap of assuming more risk than their accounts will stand.
The general rule of thumb is that you should not have more than 5% of your account at risk at one time. While this may be sound advice for a larger account, it is not really relevant for the small trader who must regularly put a higher percentage of their account at risk in order to take a trade.
While the percentage rule of thumb might not apply, a general guideline for the small trader is to avoid having more than $300-500 at risk during a trade. This level will allow them to avoid the daily ranges of most markets while still keeping their risk to a minimum.
The final step in learning to identify the best market opportunities is to realize that there are three positions a trader can have in the markets: long, short or flat (out). Too many traders feel that they have to be in the markets all the time and are therefore constantly looking for either a long or short position. It is important to recognize that the third option, being flat, is as legitimate a position as the first two.
Being flat allows you to watch the market set up so that you can best take advantage of the market when it is ready. This is what traders mean when they tell you “not to chase the markets.” It is important to learn to wait for the markets and let them come to you. Then your job as a trader is to be ready for them.
For more from Erich, visit the Indicator Warehouse for additional futures resources and NinjaTrader Indicators.