Podcast – Episode 87 – How to Scale Up Your Trading


Podcast Transcript

Hello. Hello. Hello. I want to do a little bit different today and I am going to be answering a question that I got from a podcast listener. This is a question that we get frequently, and I do encourage you to send us questions. If you have anything regarding trading or investing that we can help with, I’m more than willing for you to reach out to us. Email us, it’s [email protected]. Hopefully we can help you. If there is something we can do and point you in the right direction, we will, if not, we’ll tell you straight out, hey, we are not experts in that. We don’t know. Maybe we’ll try to find a resource for you or something, but we do our best to help everybody out as much as possible because in the end, we’re all in this together, right? Nobody’s getting out of this alive. Might as well help each other and make the world a better place. Right?

This is the question I get often and got this question recently from a listener. The question says, the one thing I struggle with is constantly being scared out of the market. I have a trading plan with iron condors and credit spreads and failed to follow it by not trading frequently enough or with enough size. How is the best way to scale up your trading to make a bigger income out of it? Basically, the fellow is saying that he does trades, mostly spreads, but he’s hesitant and scared to not do it enough and not do it with enough money when he does do it. He’s thinking about how can he scale up his trading to be better at it or make more money from it? The first thing you need to realize is that fear is not always a bad thing. I mean, it’s there to alert you to danger, right? That’s why we get scared, something dangerous happening, but it’s also there to alert you to opportunity as well.

We look at fear as a negative thing, but fear is just a common response, right? It doesn’t have to be something that is bad for us that we are afraid of. Anything outside of our comfort zone can be scary, but that doesn’t mean that it’s bad for us. A lot of people are scared of placing their first trade. They’re scared of investing money in the stock market because they’re afraid to lose it, which is one possible outcome. Yes, but you can mitigate that and you can protect against that. When you look at it and you say, look, there are trillions of kazillions of dollars, whatever invested in stocks around the world, what do those people know that I don’t, that I’m afraid to put my money in the stock market? What are the people that are trading profitably and consistently? What do they know that I don’t know that I’m not consistent? That’s why I’m afraid of making trades or making bigger trades.

Is there a secret out there that they know that I don’t? Well, most likely not. There are certain ways to do things and once you learn those things, you can follow them methodically, but the problem is fear and emotions. I’ll get to that. The second thing you need to realize is that being out of the market is not a bad thing either, right? We don’t have to be trading every single expiration cycle. You don’t have to be exposed all the time. You get to pick and choose. If the markets get scary and volatile, there’s nothing wrong with taking a step back, catching your breath and reassessing to decide if you want to get back in, or if you want to wait until things calm down. Now this fellow thinks that it’s a problem that he’s not trading enough. He wants to trade more and he’s not trading with enough size. It would be a bigger problem if he was trading and he was losing money, but that’s not what he said. He said that he has a plan, but he’s just not doing it enough.

If his plan is profitable, then it doesn’t matter if he’s trading every month because he’s making something. As long as you’re making something and you’re compounding it, eventually it’s going to grow and just let it grow and grow and grow. If you’re not comfortable in the market all the time, and if you’re not comfortable making your trade size bigger doing more contracts, there’s nothing wrong with that. You’re okay. There’s nothing wrong with you. You’re not broken. Don’t think that. Don’t think negative. That’s a negative. No. As long as you’re profitable, you decide how much you want to trade. The gains will be smaller, right? If you have a goal, I need to be a millionaire or have 10 million dollars or whatever, yeah, it’ll take you a little bit longer. But you can still compound it, and that compounding is exponential. You might not get there tomorrow, but you will get there.

The third thing is called market risk. This is something that nobody ever talks about, which is being at risk because you’re in the market. It’s hard to take this into account, but when selling options, you have the ability to look at each and every exploration cycle as a separate time period. If you miss one, no big deal. We had one of our students, he was going in for surgery. He’s like, yeah, how do I protect my trades? How do you protect your trades is you get out, right? There’s no telling what’s going to happen in your surgery. Now, heaven forbid something really bad happens to you, but he was expected to come home in a couple days, but yeah, sure. Hey, why are we taking that risk at all? Get out of your trades. Take the time off, recuperate, go through your surgery, get better, rehabilitate. Then when you are back to normal, then you can go back in again, right? We as option traders have that ability.

Now fear and scaling are a different thing. For me, it’s been a process of focusing on managing your risk and protecting capital. As you slowly gain more and more confidence in your ability to become consistent, you will become more comfortable taking on more risk, which leads to generating more income and obviously growing the account. Does that make sense? Before you scale, or at least when it comes to a point that it is consequential to you, you have to take control of your emotions before you can start doing that. Now, that point is different for everybody. For some people, they can handle losing a hundred dollars. For some people, they can handle losing a hundred thousand dollars. It’s different for everybody. I have seen traders freak out. Putting on a trade, they get out when they’re down $200. I mean, what happened? Why did you get out? I couldn’t handle it. I was losing money. I’m like, yeah, you were technically down on paper for one day, but the thing rallied and you would have been up today.

The trade would have worked. Why did you get out? I couldn’t take it. I couldn’t take it. Okay. Well, then you know yourself, and if you can’t handle a $200 loss then maybe trading is not right for you, or maybe you need to get a handle on your emotions. Right? I’ve seen other traders on the flip side, they risk a million dollars with no trading plan or any understanding of what to do if the trade goes South. I’ve seen everything in between. I mean, when I started the Option Genius Service, right, one of the first people I talked to, this was like, way, way, this was years ago. One of the first people I ever talked to, the guy said, hey, I just joined your service and you just put out a iron condor. I just put a hundred thousand dollars in that trade. I was like, what? How much is in your account?

He goes, a hundred thousand. I mean, you put the whole thing in one trade? He goes, yep. I said, how do you know it’s going to work? He goes, well, your site looked good. My site looked good, that was the reasoning that you put a hundred thousand dollars in one trade? Are you out of your mind? I mean, you don’t know who I am. Right. Because at the time, I didn’t have a podcast. I didn’t have my picture anywhere. I told him, I remember I told him like, dude, you don’t know who I am. I could be some kid, some teenager sitting in China putting up a website trying to scam people. He was quiet. He’s like, oh yeah, I never thought of that. I mean, luckily that trade worked out great. After that, I helped him to not put all of his money in one trade, which would be a good thing for anybody. But I digress.

There are people on both sides. There are the ones that can’t take any risk and there are the ones that are super risk-takers. The thing is that it’s all pretty much mental, it’s in your head. It is fear, plain and simple, right? Trading one contract is technically the same as trading 10 or a hundred or a thousand. It’s the same trade, just different numbers. The numbers are a little bit bigger, but yeah, it can be a huge block, a mental block. Part of it comes down to knowing your dollar goal. How much do you actually want to make? If you’re trading too small to hit your goal, right? If your goal is a thousand dollars a month, but you’re only doing one trade that can only make a hundred dollars a month, you’re never going to hit your goal.

Then the goal will help you scale because that’s just mad. You’re like, oh man, I can’t get my goal. Okay. I need to do more because I need to get to my goal. The other side is to have confidence. That comes with doing the trades over and over and over and over. If you use real money, it can take years as you go through the different markets, right? You go through a bear market. You go through a bull market. You go through a sideways market. You go through a correction. You go through a dip. You go through all these different things. It takes years to understand how to trade through all those different environments. Now, as passive traders, we have the odds on our side and the trades are built in to withstand these shocks, but it can still impact us. The biggest impact is on us mentally.

I’ve done podcasts in the past where you’ve got trading scars. That was the name of the podcast, trading scars. When you’re trading and you take hits, it causes a scar mentally, not on your body but in your brain. Well, not physically but is a memory, and so when you’re in that same situation again, you have to learn how to react properly so that you don’t get another scar. You don’t get hurt again. Now that’s with trading with real money. Now, if you’re paper trading or you’re backtesting, you can get that experience much, much sooner. Even if you’re doing one, I would suggest you do the other two. If you’re just doing paper, I would expect you to do some backtesting and eventually get to real money so that you can know what that feels like.

If you’re only doing real money with a smaller account, then do backtesting and do paper trades and get as many trades on as you can handle. Get as many trades on as you can do as soon as fast as you can, that will help you get the experience. Only through that experience will you feel calmness, will you feel confident and be like, yeah, you know what? I can handle this. I traded through the Lehman Brothers collapse in the great depression or great recession or whatever they called it. Right. When the Corona thing came, I was like, oh man, I’ve been through this. It wasn’t that bad. Oh yeah, because I’ve been through it. I’ve been through worse. Right. Been through bull markets, been through bear markets, been through corrections. After a while it becomes like a sixth sense. You’re like, oh yeah, I know what the market is going to do. If it does this, I’ll do this. If it does this, I’ll do that.

But I feel confident that I can make adjustments and I’m going to get through it. But if you’ve never been through that environment before, it’s like, oh my God, the end of the world, the market dropping every day. Oh my God. Oh my God. I’m going to lose all my money. Get out, get out. The worst possible time. That’s what most people do because they don’t have the experience. Do the paper trading, do the backtesting. The third aspect of having confidence in your system or your strategy. The thing has to work too, right? The way you’re trading has to work as well. You got desire, you got experience, you got confidence. Three legs of the stool and you got to have all three. You could also look at this in a different way. If you tell yourself that you have, let’s say $3,000 and that you have to make it work. Man, this is it. That’s all the money I have in the world. I got to work. It’s got to work. It’s got to work. I got to make money. I can’t lose this money.

Under no circumstances can I lose this money. My wife is going to chop my head off or something else. Right? Then it is just too much pressure and you will either lose it or you will not trade it properly, which will end up making you lose it. So yeah, if you have that much stress on you to not take a loss, then you’re going to lose it. You can’t do that either. That’s why we always say, trade with money you can afford to lose. If you can afford to lose it, that takes away a whole negative aspect of it that will destroy you. In order to scale, step one is to be able to control yourself. That includes being okay with losing money. It includes understanding and being okay that you can lose all the money in your account. It includes not freaking out when things get volatile. You do this in a number of ways. Number one, like I said is you have confidence in your trading plan.

If you’ve put on a whole bunch of trades and you’ve seen them work, you’re going to have more confidence. If you are trading with a group or other people are doing it, or if you have a mentor that’s been doing it and he’s telling you, hey, look, this is the way we trade. This is how it’s going to work. If you’ve seen it work, then you have confidence. Number two, if you have experience doing the same strategy hundreds or thousands of times, that’s basically how you get the confidence in the trading plan. Then step two of scaling is to increase your position sizing, obviously, right? Yeah. I want to scale. Okay. Step two. Step one that we talked about was, what did we talked about? Step one, being able to control yourself. Step one to scaling is being able to control yourself.

Step two is to go ahead and then do it to increase your position sizing. Now remember, remember how you thought about going to school or training for whatever you do now for a living, for your job, right? Do you remember getting trained for that? If you had to go to college or get a certificate or go to a seminar or whatever, you did all that, you put up with all that because you were training. You were learning and it took time. It’s the same thing here. Trading takes time to learn, but this puts you in a real life seminar and you are paying your dues every day. The time that you put in, you’re paying your dues. You put your trades on, you monitor them, you debrief them at the end, right? What happened? What went wrong? What went right? What did I do right? How can I change it? How can I make my results better?

You rinse and you repeat. You got a good plan, keep doing it over and over and over again. As your account size gets larger, you can go from one contract to maybe two, then maybe to three, then to five, then to seven. You go at your own pace. There is no race. There is no time limit. As long as you’re doing constantly better, you’re being consistent like I said earlier, the account will grow in size and you’ll get more confident and you can trade more. It’s up to you. You want to go from one to five? If you got the money and you’ve had the experience, okay, fine. I wouldn’t advise it. I’d go from one to two, two to four, four to six, six to 10. Take it small jumps. It doesn’t need to be overnight because there’s no rush.

It’s not like, oh, my next door neighbor just bought a Mercedes. I got to buy one too so I need to do a hundred trades this month. No, forget him and his Mercedes. Who cares? Right? Be confident with who you are and what you have. Don’t rock the boat. We don’t want to take unnecessary risks we don’t have to. For most people, it’s better to move from say three contracts to four contracts, to six to 10 small increments because there’s no such thing as missing out on the trade of the century. There is no trade of the century. It’s like, oh my God, if I don’t invest now, I’m going to lose. I’m never going to get this opportunity again. No, it doesn’t happen. There’s no such thing. They said that before years ago, 20 years ago, 10 years ago, six months ago, they’ve been saying that forever. As long as you get in and you can consistently make money, you’re fine.

It’s just going to grow. Everything is the same. You don’t need to put all your money in one trade when you’re not ready to do so. Okay. Now, step three to scaling. Once you have increased contract size, you need to increase the account size, or maybe you need to do this in the account size before you do the contract size. Either way, but one usually comes after the other. You do this obviously by adding more money to the pot, put more money in your account. Right? Now, you can do it the other way and you’d be like, you know what? I’m just going to grow the account, and whatever I make, I’m going to keep it and just scale that way. Or you can say, hey, look, I’ve got the confidence. I’ve got my emotions under control. I got a good strategy. I got a good mentor. I feel confident to be able to go to the next level so I need to add a few thousand dollars more into my account so I can go from say, two contracts to four or four to eight, right?

I’m going to go incrementally higher. I’m not going to go from two to 10. Don’t do that. Two to four, two to five, slowly, slowly, build it up. Go to the next level, trade there for a little while, get comfortable. Then you can go again to the next level. It’s like going up steps, right? Once you’re adding more money to the pot, you can do something or you can add something to your account that’s called portfolio margin. What portfolio margin means is that you get additional leverage and you get the ability to make money quicker where less money tied up actually. For most brokers that I’ve seen, portfolio margin starts at $125,000. If you have that in your account, you get portfolio margin. Normally, when you open an account and you apply for margin, they give you two-to-one margin. If you put in $10,000, they’ll let you buy $20,000 worth of stock, but they charge you interest on the money that they lent you. We don’t really advise that.

Right now, when you’re passive trading, you need to have a margin account. If it’s a non-retirement account, if it’s not an IRA, then you got to have margin enabled so that you can do spreads. You can do naked puts. But we don’t borrow the money. Portfolio margin is a little mix of both. Portfolio margin, I believe it’s like four to one or five to one in terms of margin. If you have a hundred thousand dollars, you can actually trade with $400,000. Big difference. You could buy a lot more, but I’m not telling you to buy a lot more. I’m telling you to do it because on your trades, they can charge you less in margin. What I mean by that is if you do a naked put that is very, very, very, very far away from the money. If you have a regular margin account, they might charge you, I don’t know, they say $3,000 in margin to do that trade for example. I’m just making it up. Okay.

If you have a portfolio margin account, they look at it, they calculate that margin differently. They look at the actual risk of the trade. Because they can tell that you’re so far away from the money and that the odds are so far in your favor, there’s not a big risk of you losing money and so the amount of margin that they’re going to charge you or hold for doing that trade is going to be a lot less. It might be, say $500 compared to 2,000 or $3,000. With a regular account, they’ll charge you $500 a margin for a portfolio margin account. What happens there? Well, I can make a much greater return percentage-wise on my money. Right? Dollar-wise, they’ll be the same thing, but then I can decide, hey, what? Do I want to do two of these or three of these instead of one? Because I can, right? Because I have more leverage. I can do that. If the trade goes against me, of course, I’m still going to end up losing money and I’ll lose more because now I have three contracts versus one.

I need to be able to know and be good with that. That’s why they only give it to you if you have over a hundred or $125,000. But that’s what I did. Right? For myself, when I started scaling, I went horizontally. I’m going to lay it out, two different types of scaling. What I did, I went horizontally, meaning I put small amounts into many different accounts. I had a Roth account. I had a regular IRA account. I had one each for my wife. I had a SEP account. I had a corporate account for the company. I had a couple of personal accounts. Then I would do different trades in all the different accounts, so I got a little bit, a little bit, a little bit in all of them, right? Yes. I have a lot of money in the market but they’re spread out in all of these different accounts. That’s what I call horizontally.

In hindsight, the process worked and now all of the accounts are fairly large, but it took a lot longer than necessary because each account did not have enough money in the beginning to do everything I wanted. I was limited in the trades I could do. I was limited in the strategies I could do in the beginning because each account did not have that much money. If you have, let’s say a hundred thousand dollars, right? You put it in one account, you can do certain things with it that you can’t do if you open 10 different accounts with $10,000 each. That makes sense? What I’ve done now is I still have those accounts, but I went vertically right now. That’s how I’m scaling right now. I’m going vertically. I’m working on growing just one account to a certain level.

I have a goal for this one account, whatever money I’m putting in is going into this one account. I’m not spreading it out into all of them. I’m putting it all in one and I want to get this one to a certain level that I can use to generate monthly gains that I can either withdraw if I need to, or I can just let it stay in the account and grow. That’s my plan now. Get this account to a certain level that I want to, and then when it gets there, then I don’t need to put any more money into my accounts. Then I can take that money that I’m earning and make an investment somewhere else. The money that I make in that account, I can take it out if I want to, if I want to invest in somewhere else, or I can just leave it there, I’ll let the account grow.

I’m at the point now where it’s like, you know what? I don’t know if I want to have more money exposed in the stock market. Let’s diversify. Let’s put some over here. Let’s put some over here. Let’s invest in different things. Now I’m doing vertically. Initially I started out horizontally. It was great, but I probably could have gotten my goals faster if I went vertically from the beginning. Doing it vertically, you’re focusing on just growing one account and that were actually shown to get faster results, but it’s all based on your own financial situation. I did it the other way because I had different IRA accounts, a Roth, my wife, and there’s limits on how much you can put in each every year. Okay, I can only put this much in there.

Your Roth, IRA, you only put like 5,000 or $5,500, something like that. I don’t qualify for anymore. But when I did, I was putting I think about 5,000 a year and that’s the max you can put. If you have $30,000 you want to put in the market, then you have to put five here, five here, 10 here, 10 here, et cetera, et cetera. That’s why I ended up with those horizontal accounts instead of putting them all into one main vertical, large trading account. That make sense. The important thing is to get started. The more you trade, the more confident you will get, the more profits you will generate, and the more you will be inclined to add funds to your account. It’s just that simple. For some of you, I know that you have a spouse or a partner that’s involved in your decisions and it can be challenging when you want to scale and you want to trade larger, you want to put more money in the account. I know that. They may not be on board with it, right?

But if you follow this path, you have concrete results to show your spouse. You can show, look, look at the history. Look at my trades, look at this. I’m doing good. That will ease their mind and then it will make them not only okay with the idea, but it will get them supporting your trading a lot more. Right? The main thing they’re worried about now is that it’s going to not work. But if you have proof, if you can go to your spouse and say, look, I just did 600 trades. Look at this, trade after trade after trade and I made this much money. Then I think they’re going to support you. Don’t you think? Don’t you agree? Like, yeah, but if you show them three trades. Look, I did three trades. Okay. Let’s put a million dollars. Let’s mortgage the house. No. Right? Cool. So 90% of trading is mental. You master that, and scaling is a piece of cake. All right, folks, make sure you trade with the odds in your favor. Don’t ever forget that part of it. Take care and be safe,


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