The best way traders scale up

Hey everybody, it’s Michael Martin, thanks for being here. Please like and subscribe. If you can leave a comment, I always read them and gives me good feedback on what you think of the content. Get a lot of questions on scaling up, and I know it comes from folks who have smaller accounts sizes because they don’t like being small, they don’t like having small accounts. They know that obviously trading larger can bring greater gains. Of course, my thought process is, you know, could end up losing a lot of money by scaling up too quickly. This is a tough one because I think it’s why a lot of folks actually don’t make it, or they curtail their growth and they stunt their growth by actually growing too quickly. So say you had say 10 K and your account’s up to 11 K, you’re up, you know, have an extra thousand.
Now your position sizing should grow and your scaling should grow as a percentage of your assets. I don’t think you can go from trading ones to, you know, have to remember going from ones to twos is a 5100% increase. So in my experience, I haven’t seen folks emotionally they want to go from five to 10 or from 10 to 20 contracts, but I think it’s much more gradual. So if the volatility of the instrument stays the same and your account grows from say, 50 K to 60 K, so now what’s your risk unit? If it’s a percentage of your overall assets.
So then the number of contracts that you would have in your risk unit would have to grow proportionally with what that risk unit is. So you’re, yes, you’re trading a thousand dollars risk unit and then all of a sudden your assets grow from 50 to a hundred K and you were risking say a thousand dollars at 50. So now you’re risking 2000 at a hundred, you’re still risking the same 2%. So the number of contracts that you would have into that risk unit might grow. It might not grow by a hundred percent. Volatility can change as well. So the key is to start with what is your risk unit size? What is it of your overall capital, of your overall account balance, whatever it is your asset under management and know what that number is. Usually it’s a fixed percent, right? So if you’re trading, say one half of 1% on a hundred K, you’re risking $500.
If your account drops and you’re still trading that $500 number, you’re actually taking more risk. So if most folks that I know who are in the pro space are always thinking in terms of percentages, so that this way any loss is always the same percent, even if the dollar sign is different. So if you’re looking at trading, who knows a thousand dollars and that’s just your risk unit. No matter what your account size is, you might want to translate that and see what percentage it is so that this way you don’t amplify your position size is too big too soon because what ends up happening is, in my experience and from the folks who write in is they’re like, yeah, I was in a losing streak. I went from 50 to 40,000 and I’m going to wait and see if I have five really good trades or five winning trades in a row that I’m going to scale back up.
And my whole thing is, it’s almost, you shouldn’t even have to think about it. You shouldn’t have to come up with a rule like that. You can think in terms of saying, Hey, I’m going to trade one half of 1% of whatever my account balance is at any given time. And then I can look at the volatility and see, multiply that through the contract or calculate where my stop is on my protective stop is on my stock positions and then multiply it out by the number of shares. But before you worry about scaling up, I would more recommend again, have a good attitude always, and then two, scale up proportionally, right? Because then no matter what happens, if you’re making money and your account is up, you’ll, you’ll be trading bigger. By definition, if you’re in a losing streak or a drawdown, you trade the same percentage, but the number of contracts or the number of shares that go into that trade will be lower.
So this is one of the ways that you kind of stay sane through the whole thing is that you only actually trade bigger when your account is up or you’re on a winning streak and you deliberately end up trading smaller when you are in a losing streak. The goal for me would be to behave consistently, because if you get tied up in like, well, I’m tired of trading two contracts or two cars, I want to go to fives. So this is an ego thing though, right? It’s not based on the math that’s in your account. So you can stay emotionally or grounded and have a plan for scaling up. That’ll happen organically based on the performance of your trading. And that’s really two pieces of advice at once. Because if you are in a losing streak and or in a drawdown, I would absolutely haircut your capital to make that financial and emotional impact smaller on you, if that makes sense. Because ultimately I think it comes down to ego is that the folks want to grow their accounts too quickly and they trade and they want to increase their risk unit size to get to a bigger
Level, but they do it too soon and that puts them in a precarious spot. So you really have to think about risk units based on a percentage of your asset or as a percentage of your account size, and then go from there. I know with commodities it’s a little trickier because they all have different standardized units and if you look at the volatility, you really have to kind of create a spreadsheet. So I’ll do that for you guys and talk about it on another episode on what the math would look like cause it’s harder to visualize just in an audio format like this. Anyway, I appreciate you being here. Please leave a comment if you can always make a suggestion because I’ll do what I can if it’s something that you’re working on and if you work at an institution and you’re going through draw down, I can go through some specific examples on how you can haircut your capital in order to get your feedback underneath you and get back into the swing of things. Otherwise, thanks very much for being here, folks. I’ll see you tomorrow.

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