188: Best of Risk Management, Pt. 1

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Join TastyTrade today and earn a double commission rebate up to $3,000 total on your stock and ETF option trades for 30 days. Visit TastyTrade.com/chat for more info. All applicable regulatory exchange and clearing fees still apply. Options involve risk and are not suitable for all investors. Learn more about TastyTrade promo terms and conditions at TastyTrade.com/double. Offer expires May 31, 2026. TastyTrade incorporated as registered broker dealer and member of FINRA, NFA and SIPC. [MUSIC PLAYING] Markets, speculation, and risk. This is the Chat with Trader's podcast hosted by Aaron Feifield. Hey, friends. Welcome to episode 188 of Chat with Trader's podcast. This episode, it's exactly what it says on the tin. It's a compilation episode, the best of risk management. I've sifted through interviews that I've done over the past years and compiled some of the best bits pertaining to risk management. Once I got done though, I realized I had too many bits for one episode. So I've split it into two parts. This, of course, is part one and part two will follow on the next episode. One of the reasons for doing this episode is to highlight some interviews from the past which you may have missed. So before each snippet, you'll hear me name the guest with a very brief description and the episode number. To easily get to any one of these episodes on the Chat with Trader's website, simply punch in ChatWithTraders.com/theepisodenumber. Or you can find the link in the show notes of this episode at ChatWithTraders.com/188. First up is Andy Kirschner, with a clip taken from episode 128. Andy's an active stock trader and the founder of Kirschner Trading Group, a proprietary trading firm with offices in Austin, Texas and Midtown, Manhattan. Big mistakes that I've made. The biggest ones that I typically make-- one of my strengths is that I can hold lots of pain. And I can hold winners for a long time. It's also my biggest weakness in which is a lot of times I'll be up. I might get up 20% on a swing trade or something like that. And not, it hasn't quite hit my targets. I don't have a-- sometimes if I'm not a little bit more structured on, hey, how I need to capture profits or if it doesn't work out exactly as I intend, how do I work my way out of this trade. And so sometimes I will hold on too long, give things, let them come back too far. And so a couple of years ago, I turned a couple million dollar trade into a couple million dollar loss across a number of different stocks. And that hurts. And it just gets you a psychology all messed up. And anyway, I still have troubles with that from time to time. And I just have to journal about it and make sure that I'm a little bit more focused on making sure I have a real structure and if things aren't going exactly as I need to, how am I going to scale down? Right. So that ability to take a lot of pain on positions can be a positive and a disadvantage. I mean, is that something you have always been able to do or is that something that you've been able to get better at or has become more acceptable to you over time? I think I've always been overconfident and the numbers, the big numbers don't bother me. So you grow into it. And just recently this year, I'm sitting next to really good trader that's traded really big. And so I'm trading a lot bigger because of it. And so I'm having to change my psychology around and also tactics around how I'm trying to capture trades. And how do you handle stops when you're moving lots more shares and those types of things? How important do you think it is to have that skill have been able to take a bit of heat on a position and withhold the pain when a position's moving against you? Like, I feel like this is probably quite a key element to your success as a trader. Am I right? You know, I don't know if it is or isn't. I think it's one part of it. I think it's more helpful to kind of trade according to your psychology. If you have something that really works well for you and you can do, repeat it lots of times, then you should focus on that and make sure that find an edge and really make sure that it works for you and then see how big you can do it without affecting the way that you trade. The best traders are the ones that can trade 50,000 shares or 100,000 shares like they trade 1,000 shares and not change their decision making process for the most part. If you're going to sit in the seat all day, you might as well be doing some size. So even when you get into a position, how do you determine when you're going to get out and when you're actually going to cut your losses? Do you have a predetermined point or do you kind of fill it out as you go? Usually now, I am laddering into positions and laddering out of positions. And I get more of a feel for how things are going to happen. But I usually am trying to get in and say, OK, I'm going to risk a point, point and a half on this trade, kind of worst case. And I think I can make 3 1/2 or 4. And what are my odds? You probably have a 50/50 chance on something like that. Sometimes you may add into something and then it feels like it's really got some support in here. So I may triple my size and go, well, I'm only going to risk another 30 cents on this particular name from this spot on triple the size. But the risk reward just went from-- since it's gone against me, but it seems to be having some support. My risk reward is now not 1 to 3 or 3 to 1. It's more like 10 to 1. And so I don't mind getting in a lot bigger right here, even though my odds are a little bit less, because it hasn't worked for me thus far. But I still have-- I mean, the chances of the trade and working are less. It may only be a 30% chance that it works. But if it does, it's going to be a 10 to 1 winner. And so I modify my behavior around that at times. Now, I just want to take a step back to a comment you made to a couple of questions a guy. You know what I said? That your ability to be able to take a lot of pain on a position is probably being a caliment to your success. And you weren't so sure if it is. Do you think the traders who maybe have a lower risk tolerance make less money, though? No, not necessarily, not at all. There's lots of different styles. There work for people. Some people are scalpers. Some people are swing traders. Some people only like to do things that are set up where they're going to win 70 or 80% of the time. So you can be very successful. And you can accomplish whatever your goals are in lots of different ways. You can be a computer genius and write some models. So we've got a bunch of guys here doing quantitatively. So I asked somebody who ran a really big firm, hundreds of traders. Said, who's your best trader? And you looked at me and said, I don't have a best trader. Best trader in what? The best trader that's the best short seller in this particular market, the best semiconductor trader, the best swing trader, the best. And so matching up your psychology with the types of trading that you're willing to do and the types of risk that you're willing to take makes a big difference. And it really has helped to discover what that is. And then you have to really make sure that you have all the right habits around it, too. Are you journaling or you're viewing or you're preparing? I could tell you my exact strategy today when you could tell me yours. And unless I did all the work around it, I'd be only 20% of as good as you are at it. And probably the same thing would go for you. So it's much less about the strategy and much more about are you doing all the right habits in preparation, journaling, review, using the technology, preparedness. Next up, Trading Legend and Market Wizard Blair Hull on episode 85. Blair was a serious Blackjack player during the '70s. And in 1985, he founded Options Trading Firm, Hull Trading. In '99, Goblin Sacks acquired Hull Trading for slightly more than half a billion dollars. Okay, and if you had to summarize it for us, what ways did Blackjack help you to prepare for trading? And why were you actually kind of answered that? I was going to ask you, why were you attracted to options markets over other types of markets? Well, the Blackjack in any kind of game, any kind of game, whether it's gambling or investing or whatever, call it, the two things you need. You need an advantage, and then you need to stay in the game. And what Blackjack taught me is that I had to bet in proportion to my bankroll. I had to bet in proportion to my advantage if I had a big advantage, I could bet more money, but never more than one-fiftyth of my bankroll. That was, so if I had a hundred dollars, I could never bet more than two dollars. So that's a pretty good rule. You think about it, you're going to go to the casino and you have $10,000. The most you can bet is $200, or you will risk ruin. You risk losing all your money. So when you're playing a game, whether it be trading or Blackjack and you lose half your money, you have to cut your bets in half. And most people would try to go, they'd try to get even, but you have to do the opposite. So I'd say staying in the game was the most important thing that I learned. In fact, you mentioned CBOE, I actually started on the Pacific Stock Exchange where I at least deceit for $500 a month. But I would go around and I'd have a, there would be an option that would be, all the public were going after this option. I had it worth according to my model of, say, $25, and it was selling for $1. And so I'd sold maybe 200 of these options and I'd run around and I'd say, "Oh, that's such a juicy bet." And then I'd say, "I'd look at the price again." Well, I got to sell some more of those. And then I'd say, "I've already had that bet on the table. I envisioned a stack of chips." So I couldn't, so I wouldn't over bet. So over betting is the thing that kills you in any kind of game. You could have a winning strategy, but because of the way in which you wager, you can almost be guaranteed to go broke. Now, that's important is to, whether you have an advantage, how much you bet is as important of getting an advantage. This next snippet is from Episode 82. Now to become the trader you wish you were with Morad, aka Futures Trader 71. Do you have any tips and pointers for how to properly manage periods of drawdown or periods of losing trades where you're sort of on a run of loses and you just really feel like nothing can go right. I know you kind of head on it there with not going to attach to the outcome, but how should a trader properly manage a drawdown and maybe if you could touch on the risk management aspect of that as well. Okay, that's a really big part of staying in the game. So I could tell you in my career, I've gone through rough patches every single year that I've been a trader. If anybody has ever told you that they come in and make huge money every day of the year, then you'll want to check that trader's credentials. The fact is most of the money is made in a short period of time, a short segment of the year. The rest of the year is simply staying afoot with the market so that when that opportunity comes to push, for example, the China correction in August, you know, that big drop, you had to have been in the market and consistently in the market and following the same routine all the time to be able to participate in that in any meaningful way. And part of the process of having a few short weeks of really, really good trades, good returns, a lot of weeks of just grinding along, kind of making a living just like everybody else. But then there's also that rough patch, we call it the rough patch. And I've had rough patches that have lasted anywhere from two weeks to 10 weeks. And they come and go with time. And most of the time, they simply forced me to go back to, you know, go back to stage three of competence, what we would call conscious competence. In other words, consciously, deliberately, focusedly following some sort of a plan or our original plan or a modified plan to suit the current market conditions. And so the way to manage rough patches is to have an understanding of when one has occurred. And the way you know one has occurred is to look at the streaks that you have. And this is again, the conversation is always going to go back to really good record keeping. I mean, you're running a business. Just imagine you're running a bakery or an auto dealership or something. It would be crazy to think that you're selling something or you're running a business without some really accurate bookkeeping. Trading is a business and bookkeeping is a huge part of this business. And so you can always go back and understand that, okay, I recognize a losing streak as for me, a losing streak is for consecutive down days in a row. And I'm speaking about consecutive down days where I'm actually doing what I'm supposed to do as opposed to going off the handle and starting to fight the market or something. Those don't count as consecutive down days. It just counts as me being emotional and stupid, which means I need time off. And that's what I force myself to do is just to detach, just move away. But if I have four down days and I'm following my plan, then it tells me that something has dramatically changed. And so my response to that is to, and I'll go into how I'm managing risk through this process. My response to that is to simply take the following day off. The probability of being down four days in a row is what, 0.5, which is a 50% probability of losing to the power of four. So there's a 6 and a quarter percent chance that I would have four losing days in a row. So it's like flipping heads four times in a row. So it's 0.5 to the power of four or 6.25%. I know that for me to hit that kind of probability, that's almost two sigma or the second standard deviation. I'll back off the statistics a little bit. But for me to hit that, it's pretty hard for me to hit three down days in a row. And that's down days, me, I'm down on my PNL plus my cost, plus my daily fixed costs, rent, software, all that stuff, broken down on a daily basis. The fifth day I'm off. I'm not trading the fifth day. The fifth day is me watching the market, doing the home market, everything, watching the market. And I'm spending the day just going through trades from the past, just running through what has happened, pulling up higher time frame charts and really trying to see the goals to see has something changed dramatically enough in the market to tell me that something's wrong. In fact, last week was one of these weeks where the market was dramatically unusual. We had several days where the market gapped up in a row, gapped up and never closed the gap. And it just continued in the same direction. That's unusual behavior. I didn't have a drawdown during that period during that streak, but it tells me that something, hey, be careful, something has changed. How do I manage the losses or the risk in today? I use a regressive risk strategy. And so let's say, just for relevance sake, let's say that I generally trade 10 lots in the ES. And if I start out the day and I'm trading 10 lots and I take a trade and I take a loss, and my loss, my daily loss limit, let's say, is $2,000 or $3,000. Let's call it $3,000 per day, which means that my average update needs to be around $3,000 per day for me to stay in business in the long term. If I reach a third of the way down, then I am cutting my size to six contracts. If I get halfway to $3,000 down, then I'm only trading five. If I get three quarters of the way down, then I'm trading two. I continue to trade two contracts until I hit that limit. And it's very rare that I hit that loss limit, the daily loss limit. But I want to hit my daily loss limit with the minimum size possible. Now that's not possible if you're trading one contract. in the future or a small share size in equities. But my goal is not to make back the $1,500 that I've lost this morning or the $2,500 or whatever, that's not my goal. My focus is not the P&L. It really isn't. It took me a long time to actually be able to accomplish that. But my goal is to find my alignment with the market. I'm gonna repeat that. My goal is not to make the money back. My goal is to find my alignment with the market. In other words, get in the zone and get in gear with the market to find that wave, to be able to recognize that wave that's coming and to be able to paddle my surfboard on top of it and to finally stand and ride that wave back to shore. That's my goal. And I'm not gonna be able to do that by insisting on trading 10 lots and 10 lots and 10 lots and taking losses and then boom, five losses, five trades on a 10 lot and I'm out $3,000 and I have to stop for the day. That's not gonna help me. What I wanna do is hit that $3,000 loss limit with my smallest size possible. Because if I can't accomplish that with two contracts to where I can find my alignment and start building my account back up with a series of really good positive trades, then I'm not giving myself enough sample size or enough samples of trades to be able to find that alignment. So imagine the opposite. Imagine if you traded 10 lots and you have a $3,000 limit for the day before you have to stop for the day. Imagine if I go halfway through and I lose $1,500 and then all of a sudden I put on a 20 lot trade and that 20 lot trade wipes away the rest of the $1,500. So out of the $3,000 I have gotten, I was able to participate in the market twice with two trades. Two trades is not nearly enough to show me that something's wrong or my plan doesn't have an edge. My goal is to maximize it. If I'm gonna give away $3,000, I need to do it with a large number of trades as possible because what happens is eventually if I start to find what the market is looking to do, I start to find alignment. And as I cross, if I get down from zero to 1,500 to 1,500 to 1,800 dollars and all of a sudden, I find myself from $2,800 down on two contracts. I start to come up to $2,000, okay, I'm back to four contracts. I get to, down 1,500 dollars, I'm up to six contracts or five contracts. Now I have alignment and now I can start building that position back up. I have the confidence to push those trades or to take the trades that are paying off. I've found the edge again and I'm building back up. And to me, every other way I've tried for myself and my traders has not worked. I've had traders use a constant, doesn't matter how far you're down, just keep trading the same size. Boop, boop, boop, boop, boop. And most of the time they just limit out for the day and the accounts locked and are done for the day. What I do is I regress. I look for a regression in the amount of I'm trading and my goal is to create as many opportunities to read the market, to trade the market and read the market as possible. And I know that most people don't do that. But that, if I hit three days in a row on limit, using that method, something is dramatically going wrong. It really is. And if you're trading one or two lots, just start out with your two lots. Halfway to your limit, let's say your limits, you know, $600, you've lost $300 on your two lots, switch to one lots and get really picky about your trades. Just find the trades that you are most confident in that you have the highest probabilities on and stake your one lot on that. And it should give you about four trades before you lose the entire amount. What you don't want to do is take your two lot trade, lose $600 on one trade for the day. And that is it. That is a very binary way to lose money and my intent always in trading is to get the most, to make the market work as hard as possible, to take my money away if it will take my money away. And it often does. But I want to do it on as many trades as possible. I want to do it fighting not the market, but I want to do it fighting the probabilities, fighting the negative probability, finding that positive probability, the alignment with the market. I hope that makes sense. Next from episode 122, Doug Seafood, the co-founder and CEO of Virtue Financial. Also the co-owner of NHL team, Florida Panthers. Virtue with our question is one of today's most dominant electronic market-making firms, trading millions of times every day across hundreds of markets. Now, like how you describe it as a scale business, I think that's very cool. And one of the reasons you're able to do that is because you have very good risk controls and your ability to manage risk. On the counter to that, what are some of the, what are the sort of potential risks a firm like Virtue could be vulnerable to? Well, look, I mean, there's, you know, obviously we can't believe our own BS, right? We're connected to a lot of different venues around the world. I don't want to insult anybody, but we're subject to the lowest common denominator of technology in the world, right? The trading world. And so when we put out, we put out bids and offers, that's real risk, right? I mean, we trade a lot. Four million times a day, you can only imagine how many orders are putting out there, right? It's multiples of that, many, many, many multiples of that. And so we have to be very cognizant of the acknowledgement, if you will, in the management of those orders in a way that is seamless and human beings have to do that. You cannot rely on technology alone to do that because a human's got to react and say, hey, we put out this order, we haven't seen it or, on the contrary, you can have a situation where, you know, your algorithm is screwing up, it keeps, it's misprice something, it keeps sending an order on one side of the book. You know, it's lost a lot of money, it's made too much money, it's not designed to make a lot of money, maybe it's, you know, misprice to spread. And so we're very cognizant of that. And we've sacrificed, you know, latency by having a lot of pre-trade risk controls, but we also have a lot of what I would say are real-time post-trade risk controls where we're doing real-time, you know, house versus street reconciliations to manage that risk. Again, I come back to when you have a singular mission, you know, posting bids and offers, when you have a single platform, if you will, a single engine that is multi-asset class, multi-currency, which virtue is, when you don't have pods, you don't have, you know, trading pods, it's really just one open environment where everybody kind of collaborates and sees, you know, kind of where, what the firm is trading and what the reaction times are and whatnot. You know, that will mitigate the risk. At the end of the day, though, look, you know, we can't believe our own press clubings, right? We spend a lot of time and a lot of money always trying to improve. And, you know, hubris is a horrible, horrible vice. And so we always live by the credo that they're put the grace of God, go, "I." So risk controls are really, really important here. And when you own and operate and manage a very large integrated technology firm, like we all do, you know, we have to be really vigilant to ensure that, you know, we don't have material losses. Are you ready to get serious about options trading then join Tasty Trade, invest a PDF's best platform for options trading, 2026, stocks, options, futures, and more. Tasty Trade has everything you trade all in one platform, get low commissions, including a $10 cat per leg on options trades so you can keep more of what you earn. Tasty Trade is packed with advanced charting tools, back testing, a pre-built strategy selector, and more features to help you trade smarter. Manage your positions with speed and precision using active trader mode, one click trading, and smart order tracking. Plus, Tasty Trade's stellar trade desk team offers live support during trading hours if you need it. Join Tasty Trade today and earn a double commission rebate up to $3,000 total on your stock and ETF option trades for 30 days. Options involves risk and are not suitable for all investors. Learn more about Tasty Trade promo terms and conditions at TastyTrade.com/double. Offer expires May 31st, 26th. Tasty Trade Incorporated is a registered broker deal and a member of FINRA and FA in SIPC. Ever watch a stock rip and think, "I could have nailed that if I had real capital." The truth is many capable traders never reached their potential. Not due to lack of skill, but lack of scale. Trade the pool was built to solve exactly that. Affirm design for serious individuals who will access to the US equity markets with meaningful buying power, up to $200,000 without committing their own capital. Get access to virtually every stock and ETF. Go longer short. freely with the flexibility professional traders expect. You're evaluated on one thing, your ability to manage risk and execute with consistency. Meet the standard and you trade at scale. No subscriptions, no ongoing commitments. Whether you're still refining your strategy, a trader with experience who hasn't yet broken through or a seasoned professional simply looking for more capital, trade the pull is built to meet you where you are and take you that next step further. The markets have evolved, access has evolved, now so has the way traders operate within them. Trade the pull. In this next bit, Saul Napp from episode 76. Saul is a spread trader and former risk manager who would oversee approximately 120 futures traders at a London trading firm. Whether any specific risk parameters or rules that you would not budge on in order to protect the firm's capital and of course the trader. - Yeah, normally it was stopped. So I still like to run almost like a traffic light system. So if a trader with a career predetermined size that he could trade and the maximum he could have on, he didn't really had to trade that maximum all the time. But if the need be, you could trade up to an agreed size. But if he had this say for example, this is called a thousand pounds stop loss for the day. He got to say 400 pounds down. I would approach him or Skype him or normally he was in the office, I'd go and see him and just say that you're 40% of your way to all just stop. Why don't you take it easy for a bit. Maybe cut your size, just get a little bit back. So that would be the first warning, but that would be the first point of contact. And then if he got into a bit more trouble, maybe sort of 650, 700 pounds down, I go over to him, I suggest the break, get out your positions, pull your orders, clear your head for a little bit and definitely cut your size now until you get it back, 50% of your money back. And then if they got to there to stop on the day, then that was pretty much nailed on. The only time I would ever budge on it is if it was a really absurd market move where something unbelievable would happen and they just got caught instantly on a blip and they'd got stops out. I may let them trade again after they let a little break on reduced size and with a really tight stock for the rest of the day. But a lot of the time the guys made that back. Coming up now is an excerpt from Dan Shapiro on episode 66, Dan's an equities guy. He mostly trades highbatter names. Nowadays he just trades for himself, though he came up as a New York City prop trader and fun fact, he funded his first trade account by borrowing money from a loan shark. At the end of the day or however often you do this, how do you reflect on your trades and review or judge your performance? - That's a good question. I do it once a month. I look at my sheets once a month, okay? I fully expect, and I wanna make this, I see this all the time on social media. Stay humble, right? You hear that all the time? Stay humble. Put your head down, smile and stay humble, okay? 'Cause the market will humble you. That's all true, okay? Here's something that I completely disagree with, okay? I think you have to be a good person in life, okay? I think you have to be a humble person in life. I think when you're a trader, you have to have a God complex. You have to believe that you could walk on water. You believe that the person on the other side of the trade, I will bank up your whole life line, okay? If you're trading improperly, okay? And I have no problem taking the food out of your kids' mouths, okay? That's on the trading aspect. I believe I'm a good guy, I'm a family man, I love my kids. I'm pretty good in my community, okay? I'm a very nice person, but in trading, you gotta be Kobe Bryant, you gotta be, you gotta be Michael Jordan, you have to be a killer, okay? You have to be the absolute killer. So when I'm looking at my trading, I expect every single trade that I put on, I'm gonna make money, okay? I'm gonna make money on every single trade. Obviously, does that happen? Of course not, but you have to believe that. So what I do is every single month, at the end of the month, I'll look at my sheets and I'll look at the days and I say to myself, well, what happened that day, right? And I'll look at the trades, I'll go back on the charts and try to figure things out. And I don't look at the way I trade, whether it's a good thing or batting on a daily basis, on a weekly basis, I go through my sheets once a month, but I do truly believe as long as you don't prostitute your process, and I don't care what your process is. You could be trading credit default swaps, you could be trading e-min, whatever it is, whatever you're trading is, I believe that you will have periods of doneness, right? You'll have periods of, you'll go on a monster run and you'll have periods that you know what, you can't get out of your own way. It's called the buzz saw. Every single trader, for the exception of social media, every single trader that puts on risk, okay? Is gonna run into a buzz saw. It's inevitable. The more screen time you get, okay? The more screen time you have, and the more, you know, more hands that the market gives you, eventually you're gonna run into a buzz saw. There's been days, and I swear like the day is long, every single thing that I've done for that one day, whatever random day it is throughout my career, it's been raw. I buy the stock at the top of the channel, I get hit with a reload seller. I short the stock at the bottom of the channel, I get hit with a reload buyer. There's nothing I can do to make money that day, right? And I shake it off. There's nothing you can do. 'Cause again, sometimes you'll get that two five offsuit and there's no way you could play that hand. The only thing different about that day is, instead of me keep on compounding the problem and saying myself, well, I'm only down X, but you know what? X could turn into XYZ. So you don't wanna turn a band-aid, right? You don't wanna turn a paper cut into a severed head. So what I do every single month, I wanna make sure, yes, my losing days, I'll have losing days, but I wanna make sure, and this is where they're kinda the responsibility kicks in, I wanna make sure I didn't take that band-aid, right? That band-aid with all these paper cuts and turned it into a severed head. So if I see a number, okay? If I see a number that jumps out me on my sheets, I know there was something wrong that day. Whether it was something I was holding overnight, you know, obviously this bad news that comes out all the time, your stock can get downgraded, FDA, I try not to hold biotechs overnight, but you never know what comes out overnight. Like a couple of years ago, I was long interrupted pot-ash, IPI, and some stupid news came out the whole second, the whole group was down 25% the next day, okay? It's part of the business, so that kind of day would obviously stand out for me. But the most important thing, what I do to kind of look back at a trading month, I say to myself, well, if I made money 18 out of 22 days, 19 out of 22 days, whatever the number is, I wanna make sure the days that I didn't make money, okay? Or caught a buzzsaw, okay? 'Cause again, every single trade in the matter, who you are will catch that buzzsaw. I wanna make sure first and foremost that again, I can make back that day, whether it's the next trade, next two trades, the next day, I just don't wanna make sure I put myself in a situation being stubborn or pigheaded or just being just an idiot, okay? 'Cause again, my off-mage is to tell me all the time, the greatest thing you can do is don't trade like a pot. That's it, don't trade like a pot. The greatest advice you ever gave me, don't trade like a pot. So as long as I never traded like a pot, and those numbers that are down days are manageable, I'm fine with it. 'Cause again, that's the cost of doing business. There's not, you can't escape, there's nothing you could do. So I try to make sure those days don't jump off the page. I wanna make sure those numbers are not exaggerated to what I normally take on my days to the downside. I try to correct it if they're possibly is. If there's just one of those days that you know what, ish happens, right? We say it all the time. Ish happens, right? If it's one of those ish happens days, then you know what? I'm fine with it. Rinse repeat, rinse repeat, go to the next month. Short memory, it's just part of the cost of doing business. Next trade, next trade, next trade. - Okay, Dan, so while we're on this subject, let's move a little deeper into risk management and position sizing. There were a few questions that actually came through on Twitter about this. So can you talk to us about how you actually measure the size of your positions? - Well, let me say this. I wanna actually break this down, 'cause it's different how I do it. I've been doing this for 16 years. Okay, let me tell you what the advice I give to new traders. Number one, most new traders again, as we all know are under capitalized. Okay, and there's a whole theory out there. There's so many different ways of kind of doing risk management. This is what I tell my guys. This is what I was in the prop business. This is what I used to tell all my traders. If your account size is $25,000, okay? If your account size is $25,000, the maximum, maximum fixed risk on every single trade should be 1%, right? 1%. That should be your maximum risk. Now, here's where things get very, very good for you. Okay, here's where we get a good view. So let's just say, for example, a stock closes, and again, goes back to the 500 charts previous night to get to your homework to the next day. So let's say solar city closed at 24, 24, 75, right? 24, 75. The high for that day was 25 bucks. So I know going into the next trading day, if it takes about 25 bucks, I wanna be long the stock. Okay, so let's say you have a $25,000 account, right? 1% of $25,000 is $250, correct? So that is your max risk. That is your max risk. So you know going into the trade, okay? How many shares? What's the biggest bang from my buck that I could put on still? have a fixed cost of $250 and get the biggest bank to the upside if the stock works. So you say, well, I'm buying the stock at $25, stock closed the previous day at $24.75. So if the stock fails, stock fails, my maximum pain is $250.25. So I'm buying a thousand shares. So if the stock goes up $1, goes up $2, you're risking $250 to make $1,000, $2,000, etc. For example, if you buy a $5 stock, right, a $5 stock, stock closed at $4.95, you're buying the stock at $5, you know you have a $5.00 ricks max, you know your fixed rate, your fixed cost is $250.00. So you say to yourself, how many shares can I maximize? Would again, the biggest max pain is 1% of my account, which is $250 and your upside is again, where the chart looks. So you say to yourself, well, $5.250 risk I'm buying 5,000 shares. So the closest you are, the closer you are to the entry, the closer you are to the entry for the previous day's closing price, you can tear up or tear down and give yourself the biggest bank for your bucks. Just remember, your max pain is always fixed and with that does, it takes the complete emotional part of the trade out of the way. You don't need to, you don't need to forecast, you don't need to overthink. Oh, there's a buyer, there's a seller, there's a buyer, there's a seller. You can let the trade play out organically, okay, you can let it out play organically, you don't need to overthink, you already know your max pain and you're saying yourself, what's the most amount of shares that I could buy within this interval that if it goes, it's going to work very, very big and if I'm down, you know what, I'm still down that 1%. So again, you buy the stock at five, the stock goes to $5.50 in two days, you're up $2,500 and your max pain again, your fixed max pain is still that $250. You could do that with Google, you could do that with Apple. So okay, you have a $25,000 account, maybe $25,000 account is a little bit of a hard stretch trading Google. But let's just say, you know, you say this yourself, okay, I'm risking Google, you know, I'm risking Google, you know, the previous day's high was, I just picked a number, $750, whatever it was, $750, the stock closed at $7.48, right? $7.48. What is the maximum shares I can buy? Okay, and sell, have my fixed cost, my max pain that I could trade Google, not get shaken out, and still say the same thing. So you say, so well, I could buy roughly 100 shares of the stock, I'm risking two, two and a half points and if the stock goes and again, everybody knows how Google could run and goes on a multi-day run, you can make 20, 30 points in Google. So the best thing for new traders is stop overthinking because remember, there's only three parts of a trade. Just think about that. There's only three parts of the trade. It's the process, right? Your tier size and the result. There's nothing else, okay? There's nothing else. But if you can't intelligently, okay, understand your max pain. If you can't intelligently have the proper tier size, your result is already lost because all your emotions are already engulfed in the first two parts of that trade. So if you're buying a stock, right? If you're buying a stock and you can't sit in the trade for 10 cents, you're trading way too much size, right? Way too much size because I hear it all the time. Well, the stock is not going. Well, the stock is down to $0.7 against you. Yeah, but the stock is not going, and 30 minutes later, the stock takes out the highs of the day. So tier size is very, very, very important, but more important, your tier size is having your fixed max pain. So if you go into every single trade and you said, "Yes, I'm a new trader. I'm going with that 1%, I'm going with that 1%, maximum drawdown per position." Now all I need to do is figure out from the time that I'm entering the trade to my whatever my stop is, whether it's on the 15 minute chart, your maximum drawdown to the downside, or on the daily chart from where the stock previously closed. I already know by max pain the dollar amount. Now I have to figure out the correlated number of shares, how much to buy, and then I give myself the biggest bang for my buck. Because again, it's all about risk-defined trades. If you're risking $1,000 to make $300, you're wrong. If you're risking $500 to make $200, you're wrong. But if you put aside an allocated percentage, which is a 1% basis, which I always tell new traders to do, you're ready though your max pain, you can do the numbers very, very quickly in your head. What's the difference between the closing price and the entry in the next previous day? Give yourself the biggest bang for your buck. Let the stock run. Take your cash flow. Hold the runner. Use break-even as you stop. Again, rinse repeat, rinse repeat. You're now about to hear from Sam Bankman Fried, who featured on episode 177. Sam was an ETF trader at Jane Street prior to relocating to Hong Kong and starting his firm Alameda Research. Alameda is a big volume quantitative trading firm solely focused on cryptocurrency markets. So what would you say is, what would you say is like the biggest risk as a liquidity provider in the crypto market? What's the biggest risk to you guys? Yeah, and I think that risk can mean two different things. We split it up very much between these two. One sort of risk is the risk that we just don't make much money. To that extent, what are the risks? Well, obviously more competition is one of them. Us just doing a mediocre job. I think it's probably the biggest. This is a really complicated, messy environment. You can only do these trades if you get a lot of things right. If we just kind of have assets and we're like, yeah, I don't know, it'd be nice to have this bank account. It's a lot of work. That's not bother. Now, if a sudden some great trade comes up, but you can only do it if you can send money to that bank account, you should bother getting. This seems like a lot of work. Now, you're not making money. I think that's maybe our biggest risk in terms of why would we stop making money? The answer is we just are kind of lazy. Just don't do a good job and we'll still make money. It's not like we just have this machine we can turn on and it's going to put money forever. We need to keep innovating, keep working hard, keep refining our systems, keep refining our internal intuitions about what's going on and keep getting better every day in order to keep up and to keep growing. That's one way to think about that. The other way to think about it is what's the biggest risk for us losing a lot of money? Well, there are a few big ones. I think exchange hacks are obviously one of these. We have to be really mindful of where are we putting our assets. Do we really want to have 20 million dollars sitting on Guadriga? That probably would have gone so well. Being smart about how much you're putting where, managing your risk. There's another one of like, do you just do something totally crazy? Do you decide, yeah, let's get long, 200 million dollars. A Bitcoin hope for it will go up. Well, it's fine if you got $10 billion and a mandate to take risk. But if you don't and Bitcoin crashes, you just lost a lot of money. I think we kind of think about this, the large risks. One of them is somehow an exchange loses our assets. The other is we just put on positions that we have no business putting on that are way too lip risky and we get a look at lose to them. Taking us out here on the best of risk management. Part one is Anthony Crudelli. Anthony is an ex-pitch trader of e-many S&P futures and he's also a budding podcaster. He is the host of Futures Radio Show. What was it that what did you change? Like, why did it all of a sudden things start clicking for you? Were you doing anything different? Like, what was, was there anything noticeably or significantly different that you were implementing? My risk management. I became extremely efficient at managing risk. How did I do that? Well, when I started to figure out was, okay, start my position small. If it starts to go my way, I would potentially add. If it started to go back against me, I would scratch. I basically would always start my position at 25 to maybe 35% of what I was going to sell. So let's just say I was going to sell 3. I'd sell 1, then I'd sell 1, then I'd sell 1. Before I would just sell 3, then I'd buy 3. So what I started to do was basically get in small at my initial area and then I would be quick to add, quick to cover and I started to be able to massage my areas. We basically was what I was doing. So if I wanted to sell 1 or buy 1 on a specific level, I'd buy 1. I'd watch it sit there a little bit, then I'd buy another one, then I'd buy another one, then I'd go my way, then I'd sell 1, then I would sit there, and then I would sell another one out, and then I'd keep 1. And I would try to work that. So what I started to do was, once I started getting really comfortable doing that, I started with 2, then I went to 4, then I went to 6, and I started testing myself when I was up money. So what I started to do was when I was up money, I would start to press a little. I'd press a little bit, and then the next day I'd press a little bit more. You know, I'd be up 800, I'd risk 300, go up 500. I'd be up 900, I'd risk 400, I'd go up 500. You know, I'd be up 600, I'd risk 100, I'd go up 500, I'd always try to go up 500 bucks. Then one day you hit them for 1200, and you're like, "Hmm, I got 700 bucks a risk now." So what I would do was, now my downside was only 500 bucks a day. So if I hit that 500, I'm done. But when I started getting up more than 500, I'd play with that money. and I started to press. And then I'd press a little bit more. So then all of a sudden I'd trade a little bit bigger. So when I was hot, I'd be pressing, when I was cold. If I started off my winning, my first trade was a loser, it would only be on the third of my position. So when I was finally getting into a full position, it already be partially my way. So I learned how to scratch, or get out of a portion of that position. And I would always constantly keep myself small, get back small. And I did that and I was able to escalate that rather quickly. I would say within, I don't remember exactly, but let's just call it within two months. I was already, I went from trading. I typically traded under five lots, majority of that time, prior to that. And I went from like 10,000. I remember I was like 20 something thousand just by trading like between four and six lots. I was just basically making 500 to 700 in a day, over about a month and a half. And I remember getting my count just over 20 grand. And I was like, okay, and remember, I wasn't taking money out because I was working on the floor. I was finally able to build it. So what I started to do was I started just off my size a little bit. So I remember within that span now, I had worked my way up. I did my first 50 lot and I remember my first 50 lot. And it was just like, I bought five, I bought five more, then I bought 10 more. And these are all within a couple of ticks. Then I won't one tick my way again. And then I bought 20. And I was like, okay, now I'm long 40. And then I bought 10 more. I remember seeing it long 50. I'm like, if this thing doesn't go my way, one tick right away, I'm gonna turn around and sell it. I want one tick my way, two ticks against me. Boom, I turn around and sold 50. And I was like, okay, wasn't so bad. I did it. I felt like a sense of like, I can do this. I can trade 50 lots. You know, I didn't go right back into it, but I continued to test the limits to see how I would feel. So I started like playing with my emotions. Okay, 50, then all of a sudden when I had 50 on, 10 felt more comfortable, more controllable. And that's how I slowly built it up. And eventually I was able to build it up to some real size. And, you know, but that's how it started. - I've got one last question for you. And that's pretty much, do you have any final words or anything you'd like to pass on to other traders this thing? I know, you've obviously been through quite a rollercoaster journey yourself. Are there any lessons you'd like to pass on that might be helpful to anyone listening to this podcast right now? - I think the most important thing for traders to really understand is loss. I think it's the hardest thing. I think that people come into this like myself with expectations to make money. And I know from a lot of your guests, 'cause I've listening to your shows in the past, which are great, by the way. I think that a lot of good traders will say this. But the one thing that I believe is most important is understanding how to manage your risk. That's what changed my life. That's how I changed everything. And having a set of rules that are like instincts to you. Not having a set of rules that you have to look at on a piece of paper. Like I'm a firm believer that, especially in the futures markets, you can't be going back and trying to, you have too many things in your head, you're going to struggle. Learn how to manage your risk. Understand that loss is part of the business and you will be able to heal from your loss. I come in every day and I know how much I'm on a risk. Per day, I know what I'm going to risk. Per trade, I know how much I'm going to risk. Per month, and at that point, the worst thing that happened is guess what? I lose that risk. So I already know it going into it. So that just clears through everything. It helps me focus on what I'm doing and it helps you focus on what's important, the market. I've had so many young traders come to me and the one thing that they just can't get passed is when they say, well what should I be focusing on? Anthony and I'm like protecting the downside. I said you need to learn how to lose before you could win. And people literally look at me and they think I'm crazy by saying learn how to lose before you could win because nobody comes into mindset. Nobody comes into trading with the mindset that I need to learn how to lose. It just doesn't even sound right, like because nobody wants to. But when you go into it with that mindset, something changes. At least it did for me that when I came in knowing that my number one goal was to manage risk, keep a very small, instinctual set of trading rules. I was able to free up all of the emotion and go after the market. 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