Lesson Overview

Account Size Adjustments

Not all trading accounts should be allocated exactly the same. There are different changes you need to make based on your account size.

Here we'll cover just a couple checklists of things to consider with regard to types of strategies to use, position sizes, number of trades, etc that can be different for smaller vs larger accounts.

There is no set guidelines here so feel free to tweak and customize this based on your risk tolerance and targeted returns.

More Discussion

Was This Helpful? Add Comments/Questions

  • Hey Mike – so glad you asked because we literally just loaded our account size PDF guide inside the membership area. Let me know if that guide helps!

  • I spend less than 2 hours a day on average managing all my trades. You can do it and still make lots of trades over the course of a year or couple years. There will of course be more active times that require more attention but again I watch my 2 year old daughter full time so I don’t have time to monitor the markets all day either.

  • Yes correct I think as your account size grows you could spread the risk even more.

Show Video Transcript +

In this video, I want to talk about the account size adjustments that you need to make when it comes to placing new trades. We know that all trading accounts should be allocated exactly the same.

There's no one-size-fits-all rule for trading and there are different changes that you need to make based on your own account size and we’re going to help you go through that in this video.

We come from the school of thought that as you grow your account size and as the overall account balance of your portfolio grows, your position sizes actually need to get a little bit smaller, so you need to get smaller with respect to the size of the trades that you make as you get bigger which is counterproductive than what most people think.

Most people assume that as you increase the size of your account balance, you should actually increase the size of your trades and that’s just not true. We know that the smaller we can make our trades, the more consistent and the more profitable we’ll become.

This means that while you should look to take as little risk as possible with a smaller account, so accounts under $10,000, you might have to take on larger positions or risk to make it worth your time to cover your time and to cover commissions.

We understand that there’s a lot of commissions out there and they vary greatly. I know that we've got a great commission rate here and we’ve got a video tutorial inside the membership area that helps you understand how to renegotiate your commissions lower.

But if you don't have great commissions or if you are trading in a country that doesn't allow you to have the different broker platforms that we have here in the States, then you might have to increase your position size just temporarily until you start to gain some traction or add funds to your account.

Let's actually go over just an example of just a regular order that we would actually make. This is a vertical credit spread in SPY, selling the 208/209 call spread for a $29 credit. We could take in a $29 credit on this trade and our risk would be $71.

This is an example of just a one lot trade, so you would obviously scale up this trade if you needed to, to match your account size based on the different charts that we have and tables that we’ll show you in the next slide.

But this also shows you that even with a $10,000 account, you can make a trade that represents less than 1% of your account by doing this one trade. It’s not always about the dollar amount that you’re making, but this covers commissions, and it's a high probability of success trade, so you don't need to have thousands of dollars to make these high probability trades.

When it comes to account size, we have this great downloadable PDF that you can get at optionalpha.com. Sign up for the membership. You go in there. You can download this PDF which helps you determine your account size and trade size for each different trade that you should make.

Our general rule here is that we like to be anywhere between 1% and 5% on a sliding scale. That's usually what we tell people, is that our risk should be 1% to 5% on a sliding scale basis for each trade that we make and you can see that we've done that for every account size, $5,000 up to $250,000 and different chunks.

I understand that $50 doesn't even meet the requirement of the trade that we just made, so this is where I say that if you have a smaller account and you’re under $5,000, you might have to increase your trade size up as a percentage of your account balance.

So that you are able to do some of the trades that we place here and just some of the trades that are generally in the market. But you want to try to stick to a small of a percentage as possible, but you might have to live in this side of the spectrum here, this 3% to 5% if you have a smaller account size.

We generally feel that you should go this direction on this chart. As your account size grows, you should be scaling back in every single area possible, meaning that if you have 5% allocated with a $5,000 portfolio and your account size grows to $50,000.

You should absolutely try to scale that back to 1% of your account which is now $500 versus $250. You can see that the direction we want you to be moving on this type of a grid with regard to account size and trade size is you want to be moving backwards because at the end of the day if you’ve got $100,000 or $250,000 to trade.

You don’t need to be trading $12,000 on every single trade, you want to be trading much smaller positions and you just want to trade a lot more of them, so that you spread your risk among different underlying’s that are uncorrelated and different asset classes that are uncorrelated.

This is hopefully going to be a really good guide and resource for you. You can get in a free PDF format by going to optionalpha.com and signing up for the membership. As always, if one trade is too large for your account, then don't make the freaking trade.

This is about as plain as I can say it. If you find out that one trade is too large because you’re only trying to trade with maybe $500 or $600 or $1,000, don’t make the freaking trade, it’s not worth it.

Here’s what I can tell you. If you can’t learn to make money trading options with a little money and small positions, how on earth will adding more money help? We find this in so many other areas including investing.

We have so many studies that show that people who win the lottery and make millions lose. 89% to 90% of people lose all their money, and you got to think. They have all this money, but they were never taught how to manage it.

I always say that if you can’t make money trading with a small account and a little bit of money, you’ll never make money trading with more money.

Don’t use money as a crutch or an excuse as to why you can’t be successful trading options because you can, you just have to get over the hurdle of learning how to do it correctly.

As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them right below on the lesson page. Until next time, happy trading!

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