Line Your Own Pockets

Michael: 00:00

Okay, everyone. Welcome back to another episode of Line Your Own Pockets. Really important question Dave got asked recently where, what do you do when things are going fantastic? We talk a lot about, you know, how to build strategies, how to optimize strategies, how to, you know, how to play with certain things. But, as traders, we I think we spend a lot of time when things aren't going well and trying to deal with that.

Michael: 00:22

But I think the question that Dave got maybe even more important for what you do when things are going great. How do you get bigger in those trades? How do you size up your position? How do you take more risk? And responsibly.

Michael: 00:33

Right? So, Dave, when you, describe the question you were asked, and and we'll start going through it.

Dave: 00:39

Yeah. So I got this question from Garrett Drennan from S&B Capital. He's a good friend of mine. We've we've talked a good bit. He said, how do you determine when to increase the risks portrayed on your model?

Dave: 00:54

Great question. And I sent this message to my newsletter with a quick synopsis because the first thing I responded to Garrett with was, gosh. I could write a book on this topic. There's so much about it that is important. So I wrote a message to the the my newsletter with just a quick synopsis, like some bullet points, and with the thought of, hey.

Dave: 01:17

We're gonna do a podcast episode on this. It's such a big topic. So here it is. And I was reminded again, one of the guys I'm coaching is crushing it. He's got several new strategies.

Dave: 01:31

He's so excited about sizing them up Mhmm. Because he's seen you know, people are skeptical. And when they start this process and they start trading the strategy, they see they at some point, you know you have an edge. So at that point, they're like, oh my gosh. I am so excited.

Dave: 01:53

It's been you know, I it's taking me forever to get to a point where I actually have an edge. I'm ready to go all in with this thing. And there's a whole lot of reasons not to jump into the deep end with this. So let's talk more about it. What are your initial thoughts, Michael?

Dave: 02:15

What what sort of experience do you have with this?

Michael: 02:17

Well, just, you know, call it call it fate or call it the market gods or whatever you want. The second you go, I'm gonna go all in with this and you hit the button to go all in, you a 100% know that you're gonna have a perfectly normal drawdown that is going to feel way worse than a perfectly normal drawdown. So I've done this myself where you're running a strategy and it's doing well. You know, you're up couple thousand. You're up a couple more thousand.

Michael: 02:41

You're like, you know what? I'm just gonna quintuple the size. Then you go to a normal drawdown, and because you're trading bigger in this drawdown, it ends up wiping out all your profits, and you feel like you're, you know, completely, completely done. So, I know what we're gonna end up talking about and coming into is some sort of, a system like anything else for increasing size in which it's not going to do that much damage either financially or I think more importantly, mentally. Right?

Michael: 03:10

I think that's part of the problem is that, you know, you have to be able to withstand those draw downs and have the mental wherewithal to come in every day and do the same thing you did yesterday even though now the number on the screen is quite a bit bigger.

Dave: 03:24

Yeah. So most traders size up too quickly, or they want to size up too quickly, and they end up sizing up too quickly. And there's a lot of reasons for that. I think, you know, a lot of it is the newfound confidence you have when you have an edge. Yep.

Dave: 03:48

And, really, the important thing to remember is if you've created this edge properly, it should be durable. It should be if you've done it correctly, it's gonna last a while. It's not gonna be the flash in the pan. Yep. So and because of that, you should never be in a hurry to size up.

Dave: 04:15

You should also never be in a hurry to size down. So anytime I've thought a lot about this. Anytime in trading, if you feel like you're in a hurry to do pretty much anything, there that that should be a red flag. Mhmm. So if you feel like you're in a hurry because you're gonna miss out on some profits that are gonna come in for your strategy, then maybe you need to revisit it, and maybe it's not as durable as it could be.

Dave: 04:42

Because if you're if you think there's some deadline where this thing's gonna run out, then that's a problem. You need to convince yourself otherwise and not be in a hurry. You realize when you have a durable edge, there is no hurry.

Michael: 05:00

Yeah. Now, you know, it it's I understand the human the human instinct to go, okay. Right? I I want to I I figured something out. Now let me get as much money out of it as quickly as I can and and, you know, finally quit that job or pay off that debt or whatever it is that your your motivations of trading are.

Michael: 05:18

But you're a 100% right where if what you're doing is working, it will continue to work for a long period of time. You just need to make sure that you can withstand it. And, you know, I think there's gonna be a lot of analogies that we give in this one. But one of those I think the easiest one is you go to the gym. Right?

Michael: 05:33

You you get a little bit stronger. You wanna put a little bit more weight on the bar. If you throw all the weight in the bar, you might die. So you you need to make sure it'll be the same. If I go all in on an account, I might I could blow up that account if I size up too quickly.

Michael: 05:47

But you you get the urge, especially when, you know, you're you're feeling a little bit stronger, you're looking a little bit better, you're having more energy because you're healthier. It's very easy to get kind of pulled into that, and very, very hard to to pull back. So I think, like, with anything, systematizing it is gonna be the way to go. Right? And, again, to use the gym analogy, it could be, I'm gonna add x amount of weight.

Michael: 06:11

Right? Every time I can get to 10 reps, I'm gonna add this amount of weight. And then when I get to 10 reps on that, I'm gonna add this amount of weight. What are some basic systems that you can come up with when it comes to to trading to make sure you're not going too far or too fast?

Dave: 06:27

I I think the important thing to realize is that you wanna be in this game for a long time. You wanna be successful as a trader for a long time. You wanna be successful in a decade.

Michael: 06:41

Mhmm.

Dave: 06:41

And, so to do that, it's not really gonna matter that you sized up less quickly than you wanted to at this point. Yep. So, I mean, in a year, you you want a situation where you think it's a big decision about whether you're gonna size up now and how to do it. But in a year, you're gonna look back, and you're not gonna even remember this decision because, hopefully, the the your equity curve has continued to go up, and you scaled it in a proper proper way.

Michael: 07:14

Mhmm.

Dave: 07:14

I think I think it is super important to have, a plan to scale up at certain intervals after you reach certain milestones and to have a plan ahead of time to do that. It almost doesn't really matter, the plan. But just what you don't wanna do is be in a situation where I had a great day. Alright. I'm ready to size up now because I had the the great day.

Michael: 07:43

Yeah. You

Dave: 07:44

that's, you know, your enthusiasm, your excitement is gonna be at a point where you're not thinking quite clearly. So it's much better to have had a plan when you put this strategy into production, saying, okay. If I see this behavior, then I'll size up. If I see this other behavior, then I'll size down. And to have a plan ahead of time, then it's not emotional at all.

Dave: 08:11

You're waiting for something to happen. And then once you see that happen, you have confirmation, and your, the the plan that you've thoughtfully put together well ahead of time is playing out, and you're just following a script at that point.

Michael: 08:26

Well and and what, when you, you know, mentioned S and B Capital, it got me thinking right away. Right? So for those who don't know, S and B Capital's prop firm, essentially trading other people's money. Generally speaking, they're they have risk managers. Right?

Michael: 08:39

All prop firms have some method and they already have, so it's almost like you should look at them as well. They have a system in place in order to give you more risk. So the question is probably more, you know, what percentage of of that particular risk do I apply? But it just shows that the firm itself, the guys who are doing this, and I can say the same as, you know, someone who worked at hedge funds for a while. They they all have these systems in place.

Michael: 09:03

They're gonna take this amount of money that you make. They're gonna take some fraction of that, and that's gonna be your available risk. And I think it should work kind of the same way as right, maybe you have a profit goal. And every time you make $10,000, you're gonna increase your risk by 5%. I'm just pulling numbers out.

Michael: 09:19

But just like you said, a way to go up and a way to go down. Now one of the ways that I do it as someone who just trades personally is, generally speaking, there is a risk on a percentage of the value of my account per trade. So what ends up happening just naturally without me needing to think about it. Right? If I have a $100,000 account, I'm risking 1% of trade, I'm risking $1,000 to trade.

Michael: 09:41

As that account goes, if it's a $200,000 account, I'm still risking that 1%. It becomes a $2,000 per trade. So there are some systems that you can come that just kind of will naturally increase and decrease that goal. The question would be is in if I have multiple strategies, and this is my question for you, and strategy a is doing amazing and strategy b is just doing okay, when do I decide to maybe take a 2% risk on strategy a that's doing amazing and then maybe a 0.5% risk on strategy b? Do you ever just play with the individual risks on the strategy to kind of give yourself more risk on something that's doing well versus something that's doing poorly?

Dave: 10:19

Oh, yeah. Absolutely. I mean, there I I've trade, like, 25 different strategies, and they all have in various, parts of their life cycle. Right? And so I I trade them all at different sizes because of the maturity of them and the the confidence I have in them just from experience trading them.

Dave: 10:40

So, yeah, definitely vary that. One thing I I really like the way you described your the way you do it by account size, percentage of account size, because you can't really if you have that plan, it's it's gonna be a very natural process and a smooth process to increase size over time. Mhmm. I I really like that because there is something about increasing size where you have to even if you have the financial wherewithal to to jump in size, there's something that you gain by incrementally increasing over time in the experience you get at those different levels Mhmm. That is valuable.

Dave: 11:28

And you kinda have to go through that to, there's something sort of esoteric about going through it and psychologically understanding the new level that you're trading at. And it's very it's not something that you can really put your finger on, but it is very valuable to go through that process. And it's it's, you know, it's almost it's just really valuable to scale rather than have these cliffs.

Michael: 12:05

Yeah. I've always been you know, and this is just comes back from when I was mentored back at the in the prop firm days. They would reassess size just algorithmically and daily. It was just based off pure math. And the reason for that was always just the analogy of the boiling the frog alive.

Michael: 12:23

Right? Either you put a frog in the pot, you just turn up slowly enough, the frog never notices that, right, it's being boiled alive. And the the same kind of ideas that if, you know, every month, you're upping your size by this. Well, if you're a swing trader, that might not be that big of a deal. If you're a day trader, it feels like nothing, nothing, nothing.

Michael: 12:42

And then something big occurred. I would argue and, you know, feel free to push back on this. But I would argue the more incremental you could do it, if you could do it daily, if you could even do it, like, you know, twice a day or something like that, the smaller the jump is, the less that you'll actually even notice that it's happening. So for me with as a swing trader, that 1% rule, I evaluate that on my weekly closing p and l. So every single week, it's gonna and generally speaking, my p and l is not gonna have huge percentage swings from week to week.

Michael: 13:14

So the amount of that 1% that I'm changing, to me, it's, you know, it might be $20 riskier or, you know, a $100 or $200. It's it's not anything that I really care about. Be so it is incremental on the way up. And then I think the other thing that we need to make sure that people pay attention to is that it should also be incremental on the way down. And the reason I have for that is so you don't get, like, super depressed where, you know, you're going from risking again, just pulling numbers out, but, like, $1,000 a trade, and then you have a bad stretch.

Michael: 13:43

And now you're down to, like, $500 a trade. And it just makes you feel like it's gonna take forever to get to that goal. So I think the the more that you can chop it up on the way up and the more you can chop it up on the way down, the less that you'll even notice that it's happening.

Dave: 13:58

Yeah. I'm not sure that yeah. I'm think just thinking about how gradual it is in the boiling the frog analogy. I'm not sure that it would be I'm not sure that you want it so subtle that you wouldn't notice because it is something that you wanna revisit every now and then. And if there's not some built in way like, you you if you're not if you've designed it so you don't notice it, I'm not sure.

Dave: 14:28

I have to think through that. I'm not sure that's good. I would want to I would want something to cause me to look and see. I mean, it's when you trade a lot of strategies, it's easy for stuff to fall under the radar if you're not looking at it. So you really wanna stay on top of it.

Dave: 14:47

But, yeah, that's interesting. I have to think about that. That's a good one.

Michael: 14:50

Well, wouldn't there be other ways to to look at so, again, I'm I'm using the the just the weight lifting analogy where, you know, again, if you go and you say, okay. Every time I can get to 10 reps, I'm gonna put £5 on it. Like, that to me seems more important than once a month, I'm gonna put £20 on it. So I really, you know, feel the difference a bit more because that that can be gradual. Now I'd say maybe once a month, you sit back and you look at where you were and then where you are now and maybe do some sort of retrospective postmortem type of thing there.

Michael: 15:22

But, yeah, the way, again, the way I look at it is I don't wanna I I just don't want it to be something that I think about because then I think it brings in some unnecessary nerves if I go from, you know, risking, again, numbers just $500 a trade to now $1,000 a trade. That's a that's a big jump. But if I went from 500 to 550 and then 607100 and so on and so forth, those incremental things I don't notice. But then I can look back because, of course, you, you know, you record all these and you go, oh, early this year, I was risking 500 to trade. Now at the end of the year, I'm risking a thousand.

Michael: 15:57

That's amazing. I mean, I've, you know, doubled my account size. Yeah. I just I don't I don't know. I understand what you're talking about where you don't want it to be inconsequential, so you just forget about it.

Michael: 16:08

But I just don't know how much value there is actually, like, just making yourself notice what, or making yourself feel Yeah. That increase.

Dave: 16:17

Yeah. I think I I think as long as you have a regular process for reviewing it Mhmm. And and you do that on a regular basis. I think monthly is is good. You know, that's that's definitely one thing that I do with, absolute regularity is review all the systems closely every month for sizing, for just various things.

Dave: 16:45

So, yeah, as long as you have that in place, yeah, I think that's, I think that's a good process. So one thing I'll bring up here that I think is really important. As you size up, you want to be able to measure your performance before the size and after the size up, in a way that makes sense. So, you know, imagine you, you know, your strategy is doing well. You're ready to bump it up, so you bump it up some percentage.

Dave: 17:21

And then the strategy all of a sudden stops working, or it it it has a a routine period where it's bad, like as soon as you sized up. Yep. All of a sudden, you got this big dip in your equity curve. That could be and probably is completely normal. But if you're looking at that equity curve where the bigger sizes are with the losing trades because you've sized up and just the pure timing of it, it's gonna look really depressing.

Dave: 17:56

Mhmm. But if you normalize your performance and the way to to view your performance in a smart way, you can see sort of a apples to apples comparison by looking at it a different way. So that's why I always recommend using r multiples for this, r multiples and expectancy Yep. Because that would normalize that curve across whatever size you're using. So it's really extremely valuable because then you instead of looking at this curve that goes up and then all of a sudden, it's got this big, dip, which is normal, but the curve doesn't make it look that way.

Dave: 18:36

If you look at a a a curve of r multiples or expectancy, it would look completely normalized across your sizing no matter how big or small your sizing is. I love the way that is. And and you knew you wanna think about that ahead of time, ahead of any size increase you do to make sure you have that in place.

Michael: 18:57

Well and I think that's, you can do that too by using, your back test. If if you're using a system where you're trying to very closely mirror a back test, then, yeah, turn your look at your normal equity curve because you're right. It could be a slow up. And then if you size up a lot, then a quick drop down. But if you're then run the back test and you see that same drop, it will be a little bit more in perspective.

Michael: 19:22

Because, yeah, if you if you double the amount of risk you're taking and then go through a natural drawdown, that downdraft is gonna look twice big. But then if you go back to the back test, or as you said, just go into Excel and just normalize, take the risk, and lower the risk by the amount you would have been doing before the size up, then you can see what your equity curve would have looked like. And I think that is a really good way to just kinda get some of that confidence back. Right? You know, say you made $10 in the strategy, and then you sized up and you lost $5 right away, that equity curve is gonna look pretty bad.

Michael: 19:55

But if you go back and you say, well, if I left my original size, I only would have lost 2,000 or $3,000. That just makes you feel, you know, a little bit better in saying, okay. This is just a normal drawdown. I can compare it to the back test that I'm running. I can do all that and just not react.

Michael: 20:09

Because I think the worst thing that a lot of people do is size up, take a normal drawdown, size back down, take a long time to get to an equity high, size up too quickly, take the draw, and so on and so forth. So where the back test is going well, your equity curve is just straight sideways because every time you size up, right, you're getting pulled back and and vice versa. So that why one of the reasons that I believe that, you know, cutting it up as quickly as you can is or as small as increments you can helps just because each individual up and each individual down will just be a little bit little bit more muted. Now that might not get the person the goal where they want. So I guess that's another thing that I wanted to ask is do you recommend somebody has not an ultimate goal?

Michael: 20:57

Because we always wanna be grow growing, but there will always be a moment depending on what they're trading where size becomes an issue. We're just in the strategy itself. Right? If I'm going from trading a $100,000 account to a $10,000,000 account, there's there's a moment where my size is gonna degrade the strategy as well. So a lot of what we've been talking about is sizing up and the effects psychologically.

Michael: 21:22

But how do you measure sizing up and the your effects in the market itself? Is that something that you should have a separate system to kinda monitor?

Dave: 21:32

That that's a great point, and that's another good reason you should be gradually sizing up rather than at, all at once because you you'll go through that process of, not only psychologically creating a bigger size, watching the p and l numbers, that are gonna be bigger Mhmm. But, slowly increasing your size as and watch how it affects the market. It's really important to have a good way to measure the slippage you have on the way in and the slippage you have on the way out as you do this.

Michael: 22:12

Mhmm.

Dave: 22:14

Because it doesn't matter how small you trade. You are gonna affect the market just by definition. And even though the effect might not be dramatic if you're trading a small size, you still will affect the market, and it's good to have a good system in place for determining how that and measuring that. So the way I would do that is, so, you know, I I created stock ticker, the first online trading journal years ago.

Michael: 22:48

Mhmm.

Dave: 22:48

And I had a little API for entering trades into it. And not only the standard fields entry price, exit price, stop price, etc, shares, all that stuff but I would also have another field called signal price. Signal price was the price that came in for the alert, and I would pass that along in my code that would get sent to the journal. So I could see it would automatically measure entry slippage and automatically measure exit slippage. So I could see, like, all the data was collected, I could see how much my orders were actually affecting the market, how much slippage I would get, and I could compare that to the back test and and compare that over time.

Dave: 23:35

It's really extremely valuable to be able to do that.

Michael: 23:39

Yeah. Because that might be, again, completely opposite. And, again, like you mentioned, another reason to do that slowly because it might be that, right, when you if you double your position size, the strategy that drawdown is no longer a perfectly normal acceptable drawdown. That drawdown is something that you're creating. Right?

Michael: 23:58

So it may not be. And, you know, we're talking extremes and it probably wouldn't ever be that, but it could be that, you know, half of the drawdown or or a third of the drawdown is actually you. And if you jump up too quickly, you would notice that. But if there's almost like a linear, you know, you have your back test running and every time you size up, you're noticing that the gap between the back test and the real results are getting bigger and bigger and bigger and bigger, then you're like, okay, well, I'm affecting the market more and more. And then you may actually be determining kind of an upward limit to your strategy.

Michael: 24:30

So it may just get to the point where you're like, I can't size up this particular strategy anymore. Now I have to spend my time as opposed to worrying about this problem. I've got a whole other problem. I had to come up with other strategies and other other tickers to trade because I'm just getting getting too big. And that will always happen.

Michael: 24:48

It's at some point, regardless of of what it is you're trading that will happen. The question is when, and you have to determine that. If it's if you're trading the spy, you don't have to worry about that till you're multi billionaire, and then you don't have you you got other problems. But if you're trading small caps, it's gonna happen way sooner. So the question is where on that on that spectrum are you sitting?

Dave: 25:09

Yeah. And I think it would you would start seeing it in missed trades or partial trades.

Michael: 25:16

Partial fills. Yeah.

Dave: 25:19

That's what I I have a really important report that I run that does a reconciliation between the back test and my live trading. So I so right at a glance, I can see, okay. Here's the trades that the back test took that I didn't.

Michael: 25:39

Mhmm.

Dave: 25:40

And and it sums that up over any any period of time I run it on. And I can see the entry slippage over time, and it sums all that up and and compares to the back test. So you're right. It's a very that's one of the real advantages of systematic trading is having that back test as a reference. It's just so valuable to be able to do that and have that, reference point to be able to compare to.

Michael: 26:07

That's, again, I'm I'm newer to the the systematic side than you, but even more than anything else, to me, that was the the largest benefit. And as someone who's dipping my toes into day trading, part of the problem I always had with day trading was having that reference point. Because with my swing trading, I that reference point became pretty easy because it's it's the indexes. Right? Am I if I'm not consistently, outperforming the index via percentage return or risk adjusted return or whatever whatever metric you wanna use, that's fine.

Michael: 26:42

But I I have a comparison. Part of my problem with the part of my problem with day trading was determining what was a good day and what was a bad day. Right? And and and if you don't have a back test and you don't really have that framework to go off of, that becomes a really hard question. Right?

Michael: 27:02

You you can lose money. It could be a great day. You can make money. It could be a horrible day. But now that I'm getting into that and I have these back tests to compare to, then, yes, it makes it way easier.

Michael: 27:11

If I come in and I lost money with so to my back test, I go, that's a fine day. Right? If I made if I lost money and my back test made money, then I know something went wrong. So, yeah, having that to compare to and then, you know, back to the sizing to make sure that you're always comparing back to it is is really, really important because that divergence when it comes to either psychology or when it comes to big position size that can get, I think, pretty unwieldy pretty quickly if you're not going back and just checking that over and over again.

Dave: 27:39

Yeah. I agree. So let's go back to the original question here, and let's let's talk about, you know, what would happen what are we trying to avoid when we size up? And I think the what we're trying to avoid, specifically, I think, is a situation where your equity curve has gone up. You size up too much.

Michael: 28:08

Mhmm.

Dave: 28:09

And as soon as you the situation you're trying to avoid is where your equity curve below goes below 0 and for this particular strategy. So what I will tell the people I coach is sort of a systematic way to do it is, okay. You can size up. I mean, this strategy has proven that it has edge. Mhmm.

Dave: 28:32

But sort of make it a game for yourself. You can size up, but never let that equity curve go below 0. So when you have that perspective and you have that as an assignment, the first thing you'll wanna do is, okay. Let's let's size it so I know it'll never go below that. How would I do that?

Dave: 28:55

Well, let's go back at the back test and look at the worst day this strategy has ever had.

Michael: 29:02

Yep.

Dave: 29:02

And see what that would look like at the current size. And then see how much, you know, how much, how tall your equity curve is, and let's try to keep that above 0 by sizing it such that if my worst day happens, it's not gonna go below 0. So I think it's really important to go back historically. Look at the worst days your strategy has Mhmm. And plan accordingly.

Dave: 29:28

That's one of the reports that I that I'm able to run really fast with any back test. What are the worst days that this has ever had? And give me a report, of the worst to the least. And that's it's just really valuable to be able to see, okay. How what am I what is that day gonna look like and feel like?

Dave: 29:50

What is it gonna look like and feel like at this higher size? Because that's that is really what you're trying to avoid because, you know, think about it. When you're sizing up, you are super excited. You've never been more excited about the strategy. You know you've got an edge.

Michael: 30:06

Yep.

Dave: 30:06

So if if the first thing that happens is you size too much has sized up too much and then your equity curve goes below 0, that's the worst thing that could happen. That's what's exactly what you're trying to avoid because you were at this real psychological peak.

Michael: 30:23

Mhmm.

Dave: 30:23

And all of a sudden, it's the most demoralizing situation you could have. It's like a it's like the market has just smacked you upside the head when you thought you had some edge, which you really still do, but the market and that equity curve is telling you you don't. But so it's if that's the situation you're trying to avoid.

Michael: 30:44

Well, I anything that you can gamify, I think is just good for the human brain. Right? If there ends up being, I can I can level up when I get to this thing, I think that's a a great way to do it? But let's just do a little devil's advocate advocate. I'll take the other side.

Michael: 31:00

What, what if you're sizing up too slow? Right? And there it's not so much a risk, but there could be some psychological detriment to that where you say, hey. If I just sized up a little bit more, and then the thing just goes on a an epic win streak, and you're in your head saying, well, I could have made x, but instead I'm making y because it's sizing up too slow, and that ends up pulling you along. Like, how do you manage that risk?

Michael: 31:22

Because I I do believe that it's one of those things that if you're if you're not trading big enough for long enough, eventually, it's gonna be you're gonna do something dumb. Right? Where it's like, you know, I could have been a millionaire by now trading this particular style, but I just went too slow at it. So how would you manage that? And is there any things that you'd look out to say for your trading is too small?

Michael: 31:44

It's time to time to up the game on it.

Dave: 31:46

Yeah. I so I would say probably 5 years ago, I would have said that's not really a problem. But more recently, I've realized that it has been a problem for me over my career. I think I should have take looking back, I should have taken more risks. I should have really focused on strategies and got to bigger sizes earlier.

Dave: 32:15

I don't really I don't say that too often because I, oh, I I because I know most traders' tendency is to trade up to size up too quickly. So I don't

Michael: 32:27

Yeah.

Dave: 32:28

I don't like to lead with that, and I don't really focus on that fact. But but if I do step back and look at my career, yeah, I think I should have sized up earlier. So I think that, ultimately, was a mistake. The only reason I say that is is having the perspective I have now of trading this trading strategies for 20 years now.

Michael: 32:50

Mhmm.

Dave: 32:51

And and having that perspective, I would not, I I don't wanna get traders to come away with that statement as a way you know, an excuse for them to size up too quickly because I know, just just like we said, that traders are sizing up too quickly now. So

Michael: 33:10

Yes.

Dave: 33:10

Just with that caveat.

Michael: 33:12

But, you know yeah. So we're talking about, again, the rare couple percentage, but they they do exist. There are people out there that are are too conservative with their trading. I know people who have been stuck on the paper trader for years years unable to pull the trigger. But for the person out there, what would you say that they would need to look out for or or notice in their own trading to kind of understand that they're that small group of people that should probably step on the gas a little more?

Michael: 33:42

Like so basically, you're going back and talking to yourself because not my problem. My problem is the other side. Right? I'm the guy who size up too quick. I'm the guy who takes too much risk.

Michael: 33:50

But, like, let's say now that you're saying, you know, with now in history that you should have sized up more knowing now, what should past Dave have noticed to say I really should have stepped on the gas? And these were the signs that I should have been looking out for to say I should have stepped on the gas.

Dave: 34:06

Yeah. It's a great question. I I think I would I would go back and tell myself that, you know, recognize the upbringing that I had, which was being very conservative with money.

Michael: 34:22

Mhmm.

Dave: 34:23

And if I have really recognized that sooner and, you know, looked at my strategies, looked at my financial situation, I actually asked myself, you know, what's the worst thing that could happen here? Because and like I said, that that it's not an excuse to size up 10 times what I was doing. That was just just stepping back and being more aggressive about sizing, more aggressive with, strategies that I know I knew they had edge. I know they have it. I mean, it's very clear.

Dave: 35:00

When you when you when you back dress like this and when you have this much experience, you know when you have an edge and when you don't. And it's it's good to have a a long term plan and goals for sizing up. So, I mean, you're asking you're asking really good questions here, Michael.

Michael: 35:21

Well, because I I do think it's it's important, again, for the few. Right? And I'm trying to find an analogy here, but it's, you know, the go to most people in America, we can say eat too much food. Right? And we'll go back to the gym analogy.

Michael: 35:35

I was I was chatting with this guy at the gym, and they're the regular teenagers who's just rail thin. Right? And, you know, he's chatting back and forth about like like all teenagers, he wants to get buff to get the girls. And you you're just like, I wouldn't go out into the world and say, hey, everyone. You should be drinking, like, 2 liters of chocolate milk a day or whatever.

Michael: 35:55

But that's the advice I'm gonna give to someone like that who's having this very specific problem where he cannot put on weight, which, again, you look across the western world, it's not really a problem we have. So it's it's the same thing. I think you need to look at yourself and say, am I that outlier where unreal you know, things that you wouldn't suggest for most people, I'd suggest for me. And we're never saying take your size, triple it, you know, 10 x your size, and just start going because you never get close to the point where you can lose your your capital. But I think you should do a little looking inward and say, am I being a little bit you know, am I being too conservative?

Michael: 36:30

Could I go could I crank up the size? And I'm thinking more of like, if we're looking at this as a a ramp, you have some sort of, system in place to say, I'm going to up my size. Maybe every time I'm up 10 grand, I'm gonna add, you know, 1% risk or whatever to my size. You have some ramp like that. Can you increase the the degree of that ramp just a little bit?

Michael: 36:53

And and so that, you know, when you extrapolate out a year or 2 from now, you are just way bigger than you would be if you went on your current road. Right? So it's, when I'm thinking of of the answer to that and how I would say people would want to keep an eye on how to do that. It would be more of, what is your drawdown curve look like? And it's I'm thinking back to what, what Marcin said when we interviewed Marcin.

Michael: 37:19

He said to, you know, take your drawdown curve that you haven't back test, double it, and see if you're okay with that. And I would do the same thing with your equity curve when it came to trading. If you're only drawing down 10%, and you're a young kid and, you know, you have a lot of money and and you would be totally okay with a 20% drawdown, I think, you you know, you step on the gas a little bit. You know? You ramp that whatever metric you're using, you just put a, you know, a couple numbers on it that will make it a little bit bigger.

Dave: 37:49

Yeah. I I I like the I like what you're saying there. I think that, I think it's good to have a goal for what you're what you want your trading to be in something far out there, like 5 years, 10 years. And start doing today what you want to put things in place today that will make you a better trader in 5 years or 10 years. And that's not gonna be, you know, it's actually probably not gonna be, hey, sizing right now, probably necessarily, but it's gonna be, okay.

Dave: 38:28

What part of my workflow can I put in place to make that make me the trader I wanna be in 5 years? Yep. And it's it's a it's a little bit different perspective. It's a it's like, I used to race bikes a lot, and I would do criterium races. You go it it it's basically, a loop in a town or, you know, somewhere.

Dave: 38:55

It's usually like a mile loop. Mhmm. Sometimes there's, you know, 4 corners in the race. And when I first started doing this, there's some people that are really good at it. And you're in a group of, you know, 30 more 30 or more riders inches apart going 30 miles an hour into these curves.

Michael: 39:14

Gets my anxiety going just to hear you describe it. Yeah.

Dave: 39:18

And what I found was I was not very technically proficient at going through the curves. But when you go through these turns, depending on where you are in the Peloton, if you're at the end, you're gonna get jerked around a lot because by the time the front end of the Peloton is out of the curve, they're going way faster. You're still slowing down at the end of it. Mhmm. So one of the guys I was racing with, I was like, hey.

Dave: 39:46

His name's Aaron. Great, quiet racer. In fact, he he rode with, some really famous racers. And I said, Aaron, how can I corner better? And what he told me was, Dave, you're probably looking right at the apex of the corner.

Dave: 40:06

You wanna be looking beyond the corner. Yep. You wanna be looking beyond where you wanna get to. So it's a really good trading analogy. Where do you wanna be in 5 years?

Dave: 40:18

Not, you know, what do you want your p and l to be at the end of the day or the end of this week. Look beyond that. Yep. Where do I wanna be a long time from now, well ahead of where I am now? And do the things you can do now to improve.

Michael: 40:32

No. I I like that. It's just again, it goes back to everything we talked about. You you wanna create systems now that will have you increasing your size or or or, you know, cutting work out of your workflow or whatever in the future. Right?

Michael: 40:45

Don't think about, you know, oh, I want to be trading this size, so I'm just gonna pop my way up to it now saying, okay. In 5 years from now, I want to be trading this size. How can I go from here to there and make that as incremental as possible? So I'm not just kinda going all in, but I think that's great. And I think we gave a pretty good answer to that and a lot.

Michael: 41:05

I know we didn't give a definitive do this, but I think we gave a lot of things that you can, think about, and they should lead you into the answers. Is there any anything else you want to to leave with with that question?

Dave: 41:17

I think I think we've, I think we've done a good job with this one. I'm not sure there's any more to talk about, but, Yeah. I think I like this. I like what we talked about here. You've asked some great questions, and, yes, it's good stuff.

Michael: 41:29

No. I think, I think you you listen to this, and you go for a big long walk. And it seems like one of those things that you just gotta mill over because just like, we're not gonna tell you what trading system to use. We can't tell you what system to increase your size, but we give you this framework. I think you just gotta mull it over, and and you'll come up with something.

Michael: 41:48

I'm sure that makes sense. If you've gotten to the point where this is a problem, it's a good problem to have. Right? It means you you've passed a whole bunch of other barriers in your trading. So, yeah, it was fun.

Michael: 41:59

And, again, just like we talk about all the time, we love the questions because we just get to pop in. We turn on the camera. We start ranting, and and away we go.

Dave: 42:09

Alright. Yeah. This is great.

Michael: 42:10

It's fantastic, and I am Michael Noss.

Dave: 42:14

I'm Dave May. We'll talk to you next week on Line Your Own Pockets.