Upsizing advice process and default sizes
BPA trading room Q&A: August 1, 2016
Question: For a trader that is consistently profitable and now working on increasing size, can you offer any advice on a good process, and defaults for sizing up in your experience?
Make $1 million a year?
Yeah. I can tell you that it’s real easy to do it too fast. Everyone wants to make $1 million a year, $5 million a year. Once you start trading well with one contract, three contracts, five contracts, you think, “Oh, why not 500 contracts?” And there are many factors involved. The biggest one is emotion. Once you start making pretty good money, you have to decide quality of life. You only get one life. You know, I’m 64 so a lot closer to the end than to the beginning, and I want to enjoy my days. So it’s simply less stressful not trading huge position sizes anymore, so I trade what I need to trade and I make enough money, and I’m happy.
Take a chance if right time
If you’re 30 years old and you’re really hungry and aggressive, and you still have a lot of fight and you don’t have a lot of personal responsibilities — kids, wife, stuff like that — you can take a chance. I told my three daughters — I have two lawyers in San Francisco on an MBA and LA. I tell all of them “Take chances. Do things that — you don’t have kids yet; just take chances. Go out and do anything extreme. Follow your heart and just do anything that you really think is exciting and risky. Now’s the time to do high-risk things.” But once you have kids, you have to reduce your risk. You need consistent, dependable income.
Always a second act
So I’m not sure where you are in your life, but if you’re young enough so that you can always make it back if you screw up — if you screw up 10 times — I also tell my kids, “I don’t care; go out and screw up 10 times; go out and screw up 20 times. I don’t care. You’re young enough you got a really good set of personal qualities; you’re very smart; you work very hard. There’s always a second act. No matter how many times you fail, you’ll always be able to get back and do well.”
Don’t worry about failure
So if you’re a reasonably confident person with good personal habits, I just don’t worry about failure. However, realistically if you start trading too big, you start — at least subconsciously — being aware of the concept “risk of ruin”, okay? You can get ruined. You just know that Black Swan events happen, and statistically it’s very unlikely that you’re going to lose 100 trades in a row.
But guess what? It’s theoretically possible, and there’s some magical number of trades that if you lose in a row, even a small amount, your account is going to disappear. And without specifically thinking, “Oh, I’d better watch out for that risk of ruin that Al talks about.” You’re not specifically thinking about it, but your personal radar tells you, “Uh-oh, this is dangerous.” And what that radar is saying — although it’s not using the words “risk of ruin” — it’s telling you that you’re at risk of dying as a trader. That your account might die if you risk too big, if you trade too big.
Survive—Trade smaller than you think
So however big you think you should trade, I would probably trade a third of it or a quarter of it. All of us could trade much, much larger, but you don’t want to put yourself at risk of ruination and you also have to have fun. You have to find the balance that’s right for you, and it changes. It’s changed with me at different times in my life. And your priorities change. And now I’m in a very satisfying period in my life and I have a lot more flexibility over what I can do.
It’s probably not directly answering your question, okay. More of your question:
Did you size up slowly and size down if you take a few losses? Can you continue to work up like in a bull’s channel, stair step up. Increase to five contracts, lose some, get down to two contracts. Increase to 10 contracts, lose some, go back to three contracts.
Don’t change size too often
A lot of traders do that. I personally would not be changing the sizes all that much that often. So if I were trading three contracts profitably, I would wait several months and then go up to five. Because you don’t want to be trading three contracts for two weeks and then up to five for two days, and then take a big hit, and then go back down to two contracts. You just start spending all of your time thinking about what’s the right position size for today instead of thinking, “Is this a good trade to take?” So, if you change your position size three times in a month, you’re changing too often.