Rebel Traders 046 : Get a Bigger Basket

The Rebel Traders are going to show why you need a bigger basket and how you can optimize your trading with a smarter portfolio of stocks...

Many traders fall foul of putting too many eggs in one basket. Well, Sean and Phil tackle this issue and discuss why they recommend having a much bigger and diverse basket and how you can optimize your portfolio to take advantage of different market conditions.

So, strap in and get ready to rock as the Rebel Traders break it down and explain how they do things the Rebel Trader way...

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Sean Donahoe: So why aren't we in this basket or why is it so damn hot? let's rock.
Automated: Rebel traders takes you inside the world of two underground master traders, who take an entertaining and contrarian look at the markets to cut through the noise of Wall Street and help you navigate the trading minefield. Together, Sean Donahoe and Phil Newton are on a mission to give you the unfair advantage of a rebel trader. And now, here are your hosts, Sean Donahoe and Mr. Phil Newton.
Sean Donahoe: Hey, this is Sean Donahoe and I am joined by my partner in podcasting. The man with the plan. His finger is on the pulse, it's Mr. Phil Newton. How you doing sir?
Phil Newton: I'm pretty good, is that an iPod in your pockets or are you just pleased to see me.
Sean Donahoe: Well I was ... soon as I met you the finger on the pulse. I was like, "Okay. I could have some fun with that, but I'm not going to." I was going to keep it clean and PG rated for at least the first five minutes. But well.
Phil Newton: I've ruined it straightaway.
Sean Donahoe: There you go, but this is what it's all about. So today's show is going to be about portfolio trading. See many traders all foul of putting too many eggs in one single basket, or those eggs, just not too many eggs, but they're big bloody exit ostrich eggs.
Phil Newton: That's not an ostrich egg.
Sean Donahoe: So basically what we're going to do in this show today is we're going to tackle this issue and discuss why we recommend having a much bigger and diverse basket and how you can optimize your portfolio and take advantage of the different market conditions that are out there.
Phil Newton: We've also got the rebel trader mail bank, which your trading questions are answered and the bullshits of the week where we call it the hyper hyper. All the shenanigans and nonsense, the nuisance while you're the noose and splits nevertheless on the nonsense we're going to find at the core question of where is the trade.
Sean Donahoe: Okay also. So let's dive right in. So I like that. I'm the nuisance. Your the nonsense. I'm going to have to get about a couple of T-shirts. that's absolutely fantastic. So okay, so let's talk about the problem first of all. One thing, we bang thIS drum all the bloody time, but it's one of the most common problems we see with a lot of people who are trading, and it's one of the, I would say the biggest pitfalls that people unintentionally fall into.
And that is they have two large position in two few inequity. So they're tying up a lot of their capital. It doesn't matter if you've got 10,000, $100,000, $100 million. A lot of people are putting large positions on, not only inherently creates a lot of stress.
Phil Newton: I think that they can't handle. I just want to kind of underscore it. They're all strategies ... their strategy is to have one or two positions with last edition size. But the people who use them they typically understand what they're doing and therefore doing it. I think just to underscore the problem it's going to ... It's people who don't know what they're doing using too big a position size and hoping for the best, which it is most new traders.
Sean Donahoe: Yes, and that's not a bad thing. We've all done it. We've all been there, we all started off.
Phil Newton: Well it's learning from it. Learning from it quite quickly is what separates most people.
Sean Donahoe: Well, the problem is that those lessons come at a very high cost, quite literally and figuratively and emotionally as well. If you've got a $20,000 opening portfolio or a $50,000 portfolio and you lose half of it on one trade, that is a swift kick in the gonads. That is a serious wake up call and that can hurt.
Phil Newton: Again there's time and a place for it. Again, I just want to try and separate some type of distinction with what we're talking about. Because again, there are strategies that specifically will have and can only have one position on, but it's an infrequent occurrence like a volatility situation. It's a once every.
Sean Donahoe: And that's not for the new trader.
Phil Newton: Yes. So once a year. Once every three years. One every five years, you know, like the volatility spike we saw recently to be fair that was the way that it happened was probably once in a lifetime occurrence. But a spike in volatility will no doubt happen again. And that happens a couple of times a year. And in that situation it's one trade, one position size.
And the people who trade those types of strategies, they know what they're doing, they know what's going on, they know the risks involved and they're okay with trading the bigger position size because they're trading an events and they're trying to capitalize on that. Now if that's the strategy, that's fine. So what we're talking about is what everyone else does.
The kind of the everyday trade. The putting one trade on with it's bigger position size under normal circumstances and hoping that it works out. There's a very big distinction. To be fair, there's a very big gulf between those two occurrences. The situational events type of trade versus the I'm trying to do this every day or every month type of trade.
But they're treating it like it's a once in a lifetime occurrence. Again, that's what we're on about here. It's the two big position size in one or two instruments in this case set. Well it, might be stocks, but they're just hoping that it's going to be an explosive event. And the reality is it probably won't be. And that's the big problem. Exactly. I was trying not to go there because I always use that example.
Sean Donahoe: It is and I used it onto my training. It's pointing to the outfield and just say that's where we're going to go melt.
Phil Newton: Girl over there and boys go stand over there.
Sean Donahoe: Yes. Well, here's the thing, and this is something that a lot of people don't realize, but it's a statistic I thought was pretty good. If you only hit three out of every 10 pitches made, you're a hall of famer. Okay. You're not going to hit a home run with every swing. It's just not going to happen. But when you're risking-
Phil Newton: A 30% strike rate. Yes.
Sean Donahoe: Yes Exactly. So if you hold your positions are so damn big that you're hoping that every one is going to be a home run. It ain't going to happen.
Phil Newton: You're delusional.
Sean Donahoe: And your risk is surmountable, insurmountable risk. So again, one of the strategies that we advocate especially for new traders, because we don't like stress, we don't like having a lot of capital tied up in any single one position for obviously for risk, is trade smaller and trade more. Now we're a big advocate of one trade a day looking for that one trade a day but it's got to be the right trade, not just any old trades. Like, "Oh I'll throw that on," or that kind of meets.
Phil Newton: You're going to meet strategic requirements. Yes.
Sean Donahoe: Yes. It's got to meet those strategy requirements. But what are the other reasons for trading smaller would you say though?
Phil Newton: I have a whole host of reasons. It's stress free. So again, if you've got all your position size in one position, you're going to ... your stress levels, anxiety levels are going to increase. You're probably going to have sleepless nights because you're worried about the one position. There's a whole lot of emotion attached to having a large position size in one or two positions.
And that it manifests itself as an emotional reaction. So what I want to do is I want to reduce that emotional reaction or the emotional response and whether you believe in that woo-woo beam, shaking, rattling thing. It doesn't matter. You're going to have an emotional response, whether it be anger, whether it be stress.
You might be snappy to loved ones and the people around you because you've got this underlying increase in elevated stress levels and it's bad for your health long term. So you know by reducing your position size, you're going to sleep better. You're going to have less stress. You're not going to be worried. You're going to have lower anxiety.
Your blood pressure's going to be lower. I get it sounds crazy that these things happen and in the short term you might not notice or experience them. But longterm you're going to have these experiences. So by reducing your position size, it gives you a high degree of emotional clarity. And typically what that translates to, that we can probably all understand is, you can stop making decisions.
Because again, like the rabbit in the headlights experience, you stop having the ability to make sensible decisions. So if you reduce the stress, reduce the anxiety, you're going to have the ability to make decisions. Now in a trading context, that means that you can start to evaluate new trading opportunities and then you're not looking at one position at a time and hoping that that works out.
Because you've got less exposure on a per trade basis. Then you can start looking for the next position. So the next thing that we do is we increase the frequency, the number of occurrences that you can do. We've already said in a perfect world, I'm at least looking for one trade a day. It might be there's a few more on any individual day, but at least I can find something to trade every single day that meets all the requirements.
So you do one a day. Those are usually around 20 trading days a month. At the end of the month, you've got a 20 stock portfolio and then the following month you're going to be taking some of those as profits, some of them are going to be duffers and not workouts, but you have to build this portfolio. So the hard part is month one.
Because you've got to build a portfolio and with every student I've helped with this. You know, the first month on a live accounts at certain points the anxiety and the stress tips over and it's like you're . Because when you've got that portfolio, you've got more positions. You're now not focused on one trade, or one position working out, you're looking at the average.
Again, a good comparison is guess what? Just shop on the high streets. Fancy little shoe shop that we all ... that I fantasize about in my retirement's.
Sean Donahoe: He's got a shoe fetish Ladies and Gentleman. I can't help him.
Phil Newton: What can I say? You know, we've all got our fetishes.
Sean Donahoe: His Jimmy Choo's, that's it. His Jimmy Choo's.
Phil Newton: But if you imagine this fictitious shop on the high streets. You know, if you had just had one pair of shoes in one size, you're completely reliance on the right person, common in that likes that style with the right size feet, buying those shoes. And there's no choice, and if you catch them on the wrong day, they might not buy those shoes.
But if you've got a variety of shoes to show people and a variety of different colors and a variety of different sizes, then not one person that comes in on this one day. They've got things to choose from them, that the chances, the probability that they might buy something increases exponentially because there's variety, there's choice. They're in the buyer mode.
You get what I'm saying Sean. There's a greater probability that you're going to make the sale and that's what we're doing. We're doing the trading equivalence of having our shop open every day, in the usual business hours with a well stocked product that people want to buy. And we're doing the trading equivalent by reducing opposition size and increasing the frequency of trades. That's how we do it in the trading world. That's how every other business does it.
Sean Donahoe: Absolutely. Now, the other thing is that trading smaller and trading more allows us to efficiently use our capital. One thing that is very important to me, especially with the way I trade and the way I approached the markets, is I don't want all my capital tied up in one position. That's not an efficient use of capital. I want lots of positions with lots of potential and a diversified portfolio and we'll get to that in a little bit.
But ultimately I want my money to work smart. I don't want dumb money. There's plenty of dumb ways to make money or over time or hope for the best strategies.
Phil Newton: There's also a lots of creative ways to lose money.
Sean Donahoe: Very, very valid point. There's a lot of creative ways but the ultimately using the business analogy.
Phil Newton: Think about it this way. I was just going to say this, we probably chewing at the same strand from different ends here Sean. I was going to say-
Sean Donahoe: A lady and the tramp here. Lady in the tramp, we'll meet in the middle with the meat ball.
Phil Newton: It's like multiple ... ended up giving you a snog with your meatball breath.
Sean Donahoe: Dear me, Okay.
Phil Newton: Multiple streams of income to keep with the business example. You know you've got multiple product lines, multiple streams of income. Maybe you've got several different business locations. Maybe you've got several different business types. They're all going into the business empire. Again you used the real world example, the trading equipment.
We've got multiple sources of income, we've got lots of ways that we could make money. We don't know which ones are going to work, but that same example. Multiple sources, multiple potential revenue streams from lots of trading occurrences and lots of different trade ideas.
Sean Donahoe: Now, one of the things we talk about with portfolio trading, and you're exactly right, that's exactly where I was going to go with it. One of the things that we do with a capital, we're talking about efficient use of capital is, we keep a percentage of capital out one side. That is not put into the markets, but is there just in case so that we can trade tomorrow, trade next week, next month or next year.
The reason we do that is we only have a certain percentage in the markets just in case. Now, this is one thing that a lot of people can't do it. They've got a lot of big positions, and they got all their capital tied up in the market and then one big event, let's just say they've got a lot of loan positions, maybe a couple of shots just to be on the safe side, but in a basic-
Phil Newton: Something happens. What if-
Sean Donahoe: A big world event like another ... I hate to say, and hopefully this never ever happens again. But like a 9/11 event where everything just goes to hell in a hand basket in one big shot. Problem is that means all your investments are gone. Your capitalist has disappeared, you starting again. Now this is why we like to have only be trading a certain percentage, 30 to 50% of our available capital is what about in my kind of general rule of thumb is. So that if we ever have an issue, we've still got half our capital there, but that's still allows us.
Phil Newton: It's disaster recovery.
Sean Donahoe: Yes, disaster recovery.
Phil Newton: If everything that you choose doesn't work out, the worst case scenario is, for that month, everything that you choose goes down the toilets. It can happen, it's a possibility, but if that's the situation you're still in business.
Sean Donahoe: Exactly.
Phil Newton: But what the worst case scenario is, you've lost 50% of your accounts.
Sean Donahoe: which is a lot better than losing the whole damn lot, which is what happens to most people within the first 90 days of opening a brokerage.
Phil Newton: Yes, you've not bet the farm and neither has the farm burned to the ground. You're still in business, all right. It's damaging emotionally. You are probably going to take a little break, I mean I've done this twice, where I've ditched my accounts. But because of this, I put the circuit breaker ... I like that phrase. I put that circuit breaker in place, very early on my trading career, because I was very conscious of, if I got it wrong, what's the worst case scenario?
Well, the worst case scenario is I've got no money to trade and I realized that well, If that happens, I'm not going to be in business. So I'm never going to risk more than 50% of my accounts. And that's happened twice to me. Again, user error, nothing to the strategy. I literally clicked the wrong buttons and then walked away for a few days.
In both occasions that happened, right after I'd changed brokerages. Long story for another day, Sean. But the point is the end result was I came back and I was like, "Holy Shit, what's going on?" Worst case scenario was, I'd only damaged myself by losing 50% of my accounts. That meant that after I'd got my collective shit together, I could still be in business tomorrow if I wanted to.
Reality was I took a short break, but I was back in business very quickly because it's like an insurance policy. It's the cash reserve. Now, the reason why you might have that actually just thinking about your ... we talked about those situational things as well. There's going to be a couple of times a year where, it's couple of times a year accounts or maybe a once in a decade occurrence where there is a swing for the fence opportunity.
You've got a 50% cash reserve that you can go and do something.
Sean Donahoe: Public lesson.
Phil Newton: Yes, I'm not saying use all of it, but you've got cash there to do some link with that ... Holy smoke, there's a once in a ten year occurrence or once every three year occurrence, so there's some cyclical events that allows you to expose it because you know that they don't come round every often. It's that swing for the fence opportunity. They do happen, but as we are alluded that they don't happen everyday, but when it does, you've got the reserves.
They're the reason for keeping that reserve that is, hey, maybe some situational event occurs that you can exploit and you've got, you don't have to worry about. Well, "Have I got the cash to do it? You know, you don't have to close positions to free up capital. It's there, it's ready. You can jump on it like a rush on certain people in certain professions.
Sean Donahoe: Glad you said that as well. Dear me, I was like, I'm going to cringe, I'm going to have to call my podcast editor Josh. But no, it was all good. It was good, thank you. Yes, absolutely. This is exactly why it's good to have that cash in reserves. There's been a couple of opportunities that have presented themselves to me. Which way exactly like you said.
Home run situations, swing for the fences, and I had the capital to be able to leverage that even if it was a short hit and it's like, "Okay, good, that's more cash in the bucket, boom." And this is one of the things that's very important is flexibility of your trading account and the ability to take advantage of opportunities as you see them. Now, one thing that's kind of leads to is, and this is why a lot of people are more positional traders rather than portfolio traders. I like to consider that we are portfolio traders.
We want a big basket of positions, but it allows us to segment our portfolio based on the strategies because different market conditions may require different strategies or you've got different things you may be trading with different strategies at any given point in time in the markets. For example, you might be doing, let's just say some little ... you've got a whole basket along, you've got some covered goals, you've got some ... you're selling some premiums and some options or what have you.
You don't want all of that mixed up in the same basket. It's good to have multiple baskets and this is again coming from a portfolio standpoint, everything is sorted out. So it's easy to track, "Okay, these are all over here in this position in the portfolio are doing this, this ones that are all doing this, this or this strategy. It's a lot easier to see what the hell you're doing and your businesses.
Phil Newton: Perhaps another way of viewing that, is a portfolio of portfolios. So-
Sean Donahoe: That's a good angle.
Phil Newton: But it's broken down by strategies because most people have one strategy and the way that I view my strategy, yes, it's one strategy, but think about it, it's like a holding company. And then within that holding company, I've got divisions. I've got one strategy that maybe deals with single puts and calls. The swing for the fence type of setup.
That I've got this small trade, maybe I'm using spreads, maybe I've got an income strategy, maybe I've got an iron condor strategy. All these individual strategies and reasons for putting on the trade they all have strategies. And they're all like divisions under the umbrella of the holding company if you like to sit with the first example.
Sean Donahoe: I like the analogy.
Automated: Yes. So the idea is you've got multiple strategies and then you've got multiple ways to find opportunities. So you've got strategies within strategies. Again, it sounds very convoluted but, the application of that is actually very simple, well, at least the way I teach anyways, but there's certain criteria that needs to be met. Depended on which opportunity you funnel into which category.
But the idea is as you had showed Sean, is that you've got a strategy of strategies and then that gives you more variety. It gives you more opportunity to weather the storm and there's less chance of something going wrong because you're trading in multiple market conditions should the situation occur on these individual opportunities, because you're using the right strategy for the right condition.
And then that gives you more confidence to put another trade on, and another trade on, and another trade on, and then to build this portfolio of positions builds up by a portfolio of strategies, and it's very ... I've got to admit, I've said this before, it's a very freeing and liberating experience when you get past that first month of applying the strategy that we're talking about, because you've got this exposure.
And it sounds like it should be a lot of exposure, but if you're reducing your position size and assuming you've got a strategy in place, then the third key component is to trade more frequent in this side can trade more frequently. It suddenly becomes very easy to find something or multiple somethings to trade every single day and somewhere along the way you're going to make a good amount of money.
Sean Donahoe: Well, one thing I'd also like to throw in there, and this is something that I use it for, in addition to just general organization creating this kind of like business within a business as equal portfolio of portfolios is, if I have a certain group of strategies that work in a certain market environment, Phil and I both have our own strategies.
We develop our own different bits and pieces and we've but we have the same approach to this. One thing is, if a market condition is changing, if you have everything in one basket, it's really hard to see when certain positions or doing certain things. If you've got it organized, it can be an early indicator of a market change like an environmental change.
If you've got, for example, a strategy that requires a lot of volatility and you're noticing that your particular strategy or your positions with a certain strategy that rely on that volatility are not performing as well. Outside of looking at say, the volatility index or individual volatilities. If you're noticing as a whole, the entire strategy is starting to not perform as well.
It could be an indication of an environmental change, which will allow you to be aware of the market change, that you can start adapting into other areas as well. So right outside of just being organized, having these subdivisions, it can be an awareness filter as well, which is one thing that I use it for my style of trading. What do you think about that?
Phil Newton: I agree completely. Just a bit on that it's like if you've got a trending strategy, just for example, and the situation that we're in right now is broadly speaking, the market's fingers, inverted commas, et cetera. It's in a consolidation after the financial blip that we had, so trending strategies.
While there's some individual pockets of trending stocks, broadly speaking, the market is in consolidation mode. It's going up for a day or two. It's gone down for a day or two. I'm not making trending strategies kind of stagnate. And what I'm not seeing, is new trending strategies are not presented themselves, because we're in a consolidation.
So that early warning that you were talking about, if you're monitoring multiple strategies that are good for market conditions, what you'll start to see onset, there's nothing really set it up on the trending side of things for the moments. That might be either just confirm that you think that the market is consolidating or it might be. The stocks are going to consolidate before that's translated in the index.
So there might be less settled developing where you might see an average of say 10 possible candidates in a single day. But it might start to go down to say three or none possible candidates for a trending type set up. Just as a made up example, but you're going to start to see less stock setup with a certain strategy or certain scan and that just gives you an indication that, "Hold on, something might be happening here," and then that's not going to translate into the indexes, which are just an average and aggregates maybe a few days or a few weeks but you've had that initial heads up that slink could be happening.
A good example as you were saying is, if your strategy relies on volatility, volatility might spike, which gives you an indication that, "Okay, now's the right conditions for the volatility type of setups." That means that based on expense, because you've made these observations in the past, maybe the trending strategy on great ... maybe that you put that strategy on pause and focus your attention on the volatility.
You can sort of throttle your trading frequency on one strategy to another, because after a period of time you'll start to develop experience of what it means when you get more of one type of setup versus another type of setup.
Sean Donahoe: Absodamnlutely. It's very, very important. Now, let's cut the-
Phil Newton: Are you using and might control it. The old railway has switching terminals where you've got all these leavers and you're turning the train onto a different track or you're diverting it onto a turnstile. You know you're like the third controller.
Sean Donahoe: Now, I've got to Thomas, the tank engine has stuck in my head. Dear me. Anyway, switching focus a little bit, one of the things with a lot of software that manages your portfolios and everything else is, it varies from platform to platform. What would you say, this because I know my opinion is slightly different here or couldn't be, but what would you say is the most important things to see in terms of information on your portfolio of summaries?
Obviously year to date information, your profits, your exposure, your risks and everything else, but what kind of information would you want to see on or do you have on your portfolio scripts?
Phil Newton: Tracking positions. You know what? It's one of those, what do you want a truck? A difficult question. What I trunk, is I'm looking at, firstly the basic information. What stock am I trading, what strike I'm I buying, what price did I get? You know and all that information's in your brokerage. So what I need in addition to that, is strategy information. So I can start to make sensible adjustments on the individual position and the individual portfolio.
So, if I've got a stock tile options are get in mind, you know, is it nearly there yet? If the stock is 80% of the way towards the first targets or the only target that I have, then I need to know that information. So I need to add the extra information in my spreadsheets or vice versa. If the stock gets to its targets, what am I expecting the options would be worth.
So, if we get to a situation where the stock's not really performing, but for some reason, the option is outperforming expectations. It might be that after two, three days maybe I'd take a 40% return on capital because I've got a 40% return on capital and two or three days, you know, I need that information. So I need where I think the option will go, where I think the stock will go and I have my spreadsheet workouts, the kind of the distance to reaching that goal if you like.
I also monitor the strategy that got me in the position so I can see the frequency of occurrences that we were just talking about a moment ago. It might be the help those setups dry up and I want to monitor that. Overall, performance of open positions. I don't focus so much on open positions because the way that my strategy works is, I'm going to be taking the profits usually quite quickly, so I'm always going to have the duffers waiting for them to grow into a profit. Like a farmer's waiting for the crop to grow.
That's what I'm doing. So the open positions, I'm not really so focused on the fact that I'm making a profit or a loss because when there's a profit there, I'm going to be taken it like a farmer's going to be taking the crops to market. So, overall looking at the information I've been trying to figure out, "Okay, when can I manage this position?" And that's all strategy related things.
And so that's why I was saying earlier, I started off with what you want to monitor, originally all I was monitoring was, I'm in this position and I'm making or losing money, and I used to also very monitor my friend of mines, so that I can monitor my psychological performance. Which we spoke at length about in the past. So I won't belabor that point, but that's what I'm monitoring it.
I'm not monitoring any fancy a formula or shop ratios or all of the other nonsense that you might do. Am I making money? Yes or No. Are all my positions close to targets, yes or no. If they are close to targets, then should I be taking profit? Am I running out of time? You know, should I be managing the position more effectively? Because it's got less time to get started.
That are decisions that I'm making, it's very clinical what I want to do with my portfolio. So I need strategy information and the reality, it's only two or three extra pieces of information beyond what your brokerage is going to give you. You know, where did I get in, what money you're making. There's only two or three pieces of information extra, that I need to add to the spreadsheets so that I can make these sensible decisions.
Time in trade, time left in trade. Am I getting two targets for the option or the stock depending on what my strategy is. And that's what I'm monitoring and it's nothing fancy or clever Sean, it's just that's what a monitoring.
Sean Donahoe: Well that's the interesting thing because, I mean, there's other factors that we do, but you touched on something that I wanted to talk about is, sometimes the portfolio management software is not enough. We have to have a separate log so to speak, of where we go into.
Phil Newton: I use a spreadsheet, I don't-
Sean Donahoe: I use a spreadsheet as well and with active positions, what we got in at one ... and I actually even down to the point of ... there's a little ... on some platforms there's a little text string that is the order and it's literally a little order placement piece of code and I copied that and I put that down in my spreadsheet as well and it automatically breaks that down.
Phil Newton: Think of Swim doors not for you, yes.
Sean Donahoe: I think the swim is what I was thinking of.
Phil Newton: Gives you a little breakdown of the order. If you want call for the order, it just puts all that information. It's doing exactly what you did when you did it.
Sean Donahoe: Exactly. Now, it keeps all that obviously in its own logs and everything else, but for my purposes I keep it in a separate spreadsheet, along with my emotional state, why I got into the trade, what was my ... because you'll come back to a trade, you'd be doing 20 or 30 trades in a month. You come back to it. It's like, "Why did I get into that one?"
You have to go back and look back at the chart and then we justify you what, what you did. It's a lot easier to have ... guests, ladies and gentlemen, you should have a trading log.
Phil Newton: Well we spoke at lengths about this.
Sean Donahoe: We won't belabor the point, but as you said-
Phil Newton: Let's do it anyway.
Sean Donahoe: Absolutely. That's a drawing that needs banging every bloody week, but you know, on top of that, I also use it to create my closing positions because once I do that, I know where my target is. I know what I want to do. Where I want to close, so I can quickly look at my positions, find it on my spreadsheet saying, "Okay, well, we're about 80% of the way there.
But given the time decay, save the options, right? And I'm like, well, you know what, I'll take that 80% profit or I'll cap that. I'm not going to get much more than that in the next day. I've only got four or five days to exploration. You know decay is really kicking in. I'm like, you know what, let me just take that little cap that off.
Phil Newton: Yes exactly. You might take a break even trade because you ran out of time or from that point of view, it might be that you can roll the position and ... because there's a small profits in there. It doesn't cost you anything to roll the position. Mostly we're buying options at the moment because that's the environment and I like to pick a direction, it's just my preference.
But you know, it doesn't make sense to roll a losing position when you're buying options. Does that make sense? It just doesn't make sense. So if you can do that efficiently either for-
Sean Donahoe: I'm bluffing because a lot of people do and-
Phil Newton: It just doesn't make sense. Dude, you're wrong. Your role in that position unnecessarily and hoping that it's going to turn around. Just be clinical, most of the time, I'm not rolling positions. If you're rolling a long putt or a long call, clearly your idea was wrong, your trade idea's not working out. That's why your losing money.
Now, if you viewpoint's not changed, which from time to time I'll be in that situation. I may initiate a new position. But it's usually if the criteria is met for a new trade. It's just at a different level. So I'm not rolling positions in that regard. I think that's very important. Just little random, almost like a tip of the day, Sean.
But I think that's very important so most of them are buyer of options, just to restate it. If it's in a losing states you're wrong. Don't roll it, just cut it, timeouts, let it expire. If your viewpoint's not changed and yes, maybe initiate a new position, but the reality is you're wrong. Get over it, suck it up. It's part of the losses, move on, go and find another trade.
But there's a quick tip of the day. Don't position for yet another ... because it's an expense. You're buying more time unnecessarily.
Sean Donahoe: To use the spills, sexy shoe shop.
Phil Newton: Phylism.
Sean Donahoe: Phylism here. It's like, "Okay, you've got a particular type of sneaker that just isn't selling.
Phil Newton: I know, we'll put the price on it.
Sean Donahoe: I know what? We'll put the price up and we'll buy more. We'll buy more of these. That may be work.
Phil Newton: Because that's going to make people want them.
Sean Donahoe: Exactly. So just to kind of put it in kind of a business context.
Phil Newton: I like that one, I'm going to steal that one.
Sean Donahoe: There you go. You're welcome. But now the other thing that we do on our portfolios, again, summary information is they're also waiting. Now we want to measure delta and I won't get into what ... we might do an entire show on the Greeks so to speak, but we want to measure that our portfolio balance.
Phil Newton: Sorry, wrong rick.
Sean Donahoe: I know.
Phil Newton: Take it into the Greek.
Sean Donahoe: Take it to the Greek indeed. Oh my God, that's freaking brilliant. What we're looking at though is measuring against the general markets. And we talked about this in sure, a little while ago, but make sure you get into the S&P 500, and see how long or short our portfolio is compared with the main market?
Phil Newton: It's just fun just to kind of dumb it down for the poor farm boy Sean. It's just a way of recalculating everything so that you've got the same ... It's like everyone's got their own measuring stick for example. But to make sure that everyone knows how long, I don't know a yard is.
Sean Donahoe: I know where you're going ... I was going to say where you're going with this.
Phil Newton: I very quickly, did a U-turn. But it'd be like making sure everyone understands the metric system, for example, so that we're talking off the same song sheet or the same ... We're all talking about the same measurements for example, rather than a cup of this or a handful of that or maybe two scoops of ... You know, if you use a handful, everyone has different size hands, that's all I'm trying to say.
So saying just grab a handful, not like our lovely president. I'm backing myself to a corner here Sean, what have I done?
Sean Donahoe: You are, I'm just getting in the road to hang yourself here, it's absolutely brilliant. This is not being edited out of the show, this is brilliant.
Phil Newton: I just saw as soon as I said that somewhat shocking here, you snigger and I honestly didn't plan that, but it would be like grabbing a handful.
Sean Donahoe: I'M just like, He's going to ... He's going to do it. A little left, a little right and right now he's in the corner and there's the rope. Okay.
Phil Newton: Everyone talks about a handful at the moment for different reasons, but let's just say that we're trying to bake a cake and we want a handful. We're all different size hands is all I'm trying to say. So if we use the metric system, everyone knows what one cup is because it's a standardized unit.
So what you're talking about is balancing everything in your portfolio so that when you looking at it, you can say I've got five shares long of this, which is equivalent to seven shares short of that. You've got the same system to measure the size of your positions. So it's easy to compare.
Sean Donahoe: That's exactly yes. And you're right and that's exactly what it's about. It's making sure that, "Hey, if I got long exposure, am I a little exposed to the short side? Do I have to do anything about that?" I mean, there's plenty of times where I've had a very long portfolio compared to the markets because again, that's just seems to be the opportunities now that have presented themselves.
Again, that might also indicate to me is like, you know what, let me look for some short opportunities. I got enough long opportunities, I need to balance this out because hey if the general markets take a turn the other direction, that's going to be painful. So again it's good to have that measuring stick, but it's also just like a little bit of a balance point in your business.
It's like, "Okay, where's my risk exposure?" And one of the reasons we trade a lot of ... in fact sounds like Phil just closed a position.
Phil Newton: I have just opened one actually.
Sean Donahoe: Oh, actually he opened one. You see, we actually trade them while we're talking here. But one of the things that allows us to do is we look at the markets every single day. We've got OUR positions rocking and rolling, but we don't want a lot of risk. I mean, one of the things that is very important to me and to Phil is we're very conservative with our risk.
But we have a lot of strategies that we use that give us the maximum upside. So it's basically all the benefits of a aggressive strategy with a lot of mitigated risks. So having small amount of capital tied up in our positions and then lots of positions in diversified industries allows us to mitigate that risk a lot. But then again, measuring it against the general markets, again, allows us to further be aware of any potential risk factors that could adversely affect or on the flip side, benefit our overall portfolio.
So again, having a good basket and awareness of what you're doing all sorted out into a portfolio of stocks, allows you to literally be in control of your risk exposure, which for a lot of people they don't have. And they're taking these huge risks without really being aware of the fact that they are taking these huge risks. So what would you add to that?
Phil Newton: Yes, just to underscore best practices is to reduce your position size. Again, I'm assuming that you've ... three things reduce your position size, I'm assuming that you've got a positive expectancy trading strategy, which is just the fancy way of saying we expect to make money. If you've not got one, you pick up the phone, we'll happily share ours with you. And the third thing is to trade more frequently. They're the three primary drivers behind the way that the evidence that we're talking about comes together and works.
Sean Donahoe: There you go. Now, one of the other things with portfolios it allows us to do is identify dead weight. Now this is something that, again, if you're not very organized with your portfolio, not tracking everything you're doing, it's hard to see a lot of the dead weight that might be in your portfolio. Because it's kind of mixed in with all the other stuff.
But with the right organization in your portfolio, having your basket uniquely color coded and everything else. You can see very quickly if there's any dead weight in your portfolio and make decisions on how to reduce that capital loss or exposure or what have you, depending on your strategy. Now Phil, what would you say in regard to that dead weight. We all have those positions that either are just dud.
I mean they are the ultimate duds, not milk duds. Milk duds are good but your dud positions that either just they don't have the time to come home or you are just plain out fricking wrong.
Phil Newton: I think the phrase that some most people sort of heard is cut your losses and run your winners. So that's kind of what you, I said one hour ago. As you probably gathered, I've got quite bizarre views on this, especially when it comes to options trading or on the buying options.
Sean Donahoe: And I was kind of skirting around the fact that yes, there are some depending on your strategy.
Phil Newton: Yes, there's going to be that but it depends type of situation.
Sean Donahoe: No, depends type situation. He's not that old guys. Now over here, I've don't know if they have them in the Uni.
Phil Newton: Did I make an exact reference to something that I don't know? What's going on here? What have I bumped into this time?
Sean Donahoe: You are in so many corners today, it's like you're back in school. But no, depends over here is like adults.
Phil Newton: I'm just a poor farm boy, Sean. I'm happily ignorant. I frequently say this. What have I done this time?
Sean Donahoe: Depends our adult underwear for like adult diapers basically.
Phil Newton: It's okay. No, I was right then. Yes, maybe I need those from time to time.
Sean Donahoe: Yes, there you go. Okay. So you're saying it depends.
Phil Newton: Right. Okay. What we were talking about? Where are we? What day is it?
Sean Donahoe: It's dead weight.
Phil Newton: Dead weight. So should you cut your losses and run your winners? Of course, you'd want to run your winners. I set for the winter side, the easy thing. I set targets. I don't try to run my winners when it gets to where I think it's going, I'm closing. So I'm not trying to ride it, like flogging a dead horse. I'm not going to ride it till it's knackered.
Run in to target when it does what I think it's going to do or it's most of the way there, then I'm going to close for a profit. So I'm actually taking profits as well, and I'm more actively engaged in managing winners than I am losers. In fact, I don't manage my losers because I am mostly a buyer of options and if I am the seller, I do defined risk trades.
So that means that my risk is limited as I'm mostly on the buy side at the moment. Then my risk is limited to the price that I've paid. So my risk is defined. I do not run a stop loss, I work my position size outs and my risk based on the full price of the option because I want probability on my side. As soon as I put a stop loss in the market, my probability drops dramatically.
And as a buyer option, it's already pretty poor. But by not running the stop loss, it increases my probability quite significantly because what I do know is that I will miss time my trades. Not I might, I will miss time my trades. So to get around being stopped out, I don't need to ever be stopped out again. And I'm okay with miss timing an entry because as long as my viewpoints remain the same, there is no need for me to panic.
And as such I will give my full measure of time that I've purchased for my option. Usually around 45 days as my maximum time. If the position's not worked out in 45 days, then it will timeout and it will expire worthless and I'm happy with that decision. And what that means is, is I can plant seeds like a farmer and with a consistently performing strategy and some are going to work out, some of them aren't going to work out.
The ones that work out, I'm going to take profits and go to market with them. Just stick with the farming analogy. The losers, I'm just going to plow back into the field. I'm not going to do anything with them because it's a waste of time and energy stressing out. Because I've thought about my risk on the entry and I'm not worrying about managing a crappy position.
I'm more focused on putting new trades on and taking profits. And because of that, on average, I'm winning 65% of the time.
Sean Donahoe: There you go. And that's exactly what it's all about at the end of the day. We want to make sure that, if your strategy requires that, you don't worry about them, then okay. If you have strategies.
Phil Newton: I've managed the loss upfront. Its own entry risk management.
Sean Donahoe: It's defined risk upfront. Exactly. And that's one of the important things that we do. I mean, we both do that to a certain extent as well. So outside of everything else here. I want to come to the final point here. Well actually I've got two last points I want to make about portfolio trading that I think are some of the most important.
When you have a portfolio, a basket of stocks you have and should be measuring everything and tracking everything against your trading plan. Now the trading plan will get ... I want to get into this in a little more in the next section, and hopefully you do have a trading plan. But not only do I measure my portfolio against say the S&p 500, I want to measure it against my trading plan to make sure that I'm not deviating from the business plan.
Because that's really what a trading plan is, and we're going to get into that, as I said into that a little more in the next section. Now with the tip of the week.
Phil Newton: I might do everything I'm supposed to be doing.
Sean Donahoe: Yes, and if you're not. If you're starting to have positions or ideals or ideas that are not ideal in measurement with your trading plan, that should be a huge red flag to you. Now, unless you are adapting your trading plan because you've logically methodically seen that, "Hey, this is an opportunity that I can add to my trading plan."
In other words, you're making a tactical or a strategic decision to expand, modify, or adjust your trading plan, because business has changed. That you've seen an opportunity that you can consistently leverage. Again, coming at it from this business standpoint, then fine. If not, it should be a red flag to you that you are deviating and thus creating a problem or potential risk later on.
Now one thing ... the final thing I want to say is, well is as you've gathered, we use a lot of business like references to trading. And here's why. You are the CFO, the chief financial officer of your business. Your portfolio is your business ledger. It's your profit and loss statement. It tells you exactly what's going on in your business at any one time.
It's a snapshot of where your business is right now, and as the CFO of your business, as the trader in chief, you have to use that as literally your bread and butter. This is everything and when I see people who are not using a portfolio approach to their trading and when I see people who are disregarding a lot of the points that we've raised here today.
Phil Newton: Or just shooting from the hip thinking they know better because that's what people do. It's frustrating and sad to see.
Sean Donahoe: It's risky, it's dangerous.
Phil Newton: It's like a hollow.
Sean Donahoe: And it's one of the core reasons that people blow up their accounts. I just want to say it right, off the bat. So again, a lot of the stuff that we've talked about here is vitally important for making sure that you have not only the ability to thrive in the market, but survive. And again, trade today, tomorrow, next week, next month, next year, it's really that important. So Phil any last words on this before we move on?
Phil Newton: No I think we've underscored at that. I think we've covered a lot of ground. You know ultimately trade smaller, trade more frequently, have a trading plan. And if you can kind of check those boxes or if you need help with that, then yes, pick up the phone we're happy to point you in the right direction. But I think we've said it all. I think it's been a good show so far. I'm enjoying it.
Sean Donahoe: Okay. And we still got more to go. So let's jump on.
Automated: And now it's time for the Rebel Trader tip of the week, brought to you by Ready to take your trading game to the next level. Discover where smarter traders come to get coached by the best and learning to trade just got way easier. Trade Canyon, smarter traders live here.
Sean Donahoe: So Rebel Trader tip of the week. Hey, we've mentioned it, we banged the drum, but this is very, very, very important. You do have a trading plan, right? I mean, like I said, it's not just a trading plan, it's a business plan. And you need to have that kind of mindset. None about hobbying. This is not a hobbyist market.
Phil Newton: It's your financial blueprint.
Sean Donahoe: Exactly. If you're serious about trading, you want to trade in the most efficient way possible. Your trading plan is your blueprint for your success. It's the instruction manual and guide. Now I'm going to use a very weird analogy here, but think about McDonald's for a moment. This is a multi billion dollar company ran by teenagers, that all work to a system that bullet points everything they do everyday down to the letter.
Phil Newton: Interesting.
Sean Donahoe: Now you're not a McDonald's worker here obviously, but you can understand that it's the trading plan, this process, this literal step by step, bullet printed guideline and blueprint is the guiding light for your business and that business is trading. So make sure you develop a trading plan. Make sure that you have it written down, print it out, laminate it, put it above your monitors or on your desk.
So it's in front of your face as a constant reminder every damn day. Yes, I actually have got that. Now, I've obviously been doing this a long time. I've got it down literally to a science and it's memorized, but it is constantly there. That way I never forget. I never slip. I have no damned excuse. You should do the same thing and again we might actually cover what to put in a trading plan exactly in a future show, if you don't have one already, but you get the idea.
Have a trading plan. There's plenty of guides online. There's plenty of other things. Again, we can help you with that if you want to. We'll help you create a trading plan as well, it's part of what we do at Rebel Traders and Trade Canyon, but at the end of the day have a trading plan. It is your business plan. It's not I've gone fishing plan or I want to take up basketball or basket weaving.
This is a business plan and you're business to make money, so having a business plan or a trading plan in this case is essential. It literally guides everything you do and keeps you on track. I mean Phil, what would you say about that? Because I know we banged this drum a lot and we're banging it again.
Phil Newton: Yes, I mean, a recent example, I was in ... to be fair, I was in a Facebook group, what was it, yesterday.
Sean Donahoe: My God, you were not in a Facebook group, what the hell were you doing?
Phil Newton: I was. I was in Facebook group. I've been lurking, just call me, Loki.
Sean Donahoe: Forgive me.
Phil Newton: But I was in a Facebook group and there's a couple of people there. They're interested, they're talking about trades, which is a great sort of thing that I like. They're actually doing it in real time, which is even better. But one or two very clearly new people and this trader, she is talking about putting a hedge on her portfolio or she's got some bullets positions on and she wants to put a hedge on.
She's basically asking did you do the right thing? And my immediate reaction is, "Well, what's your objective?" Well, to not lose ... You know, she's like to not lose money. I said, "Well, that's a stupid objective," as you can see here Sean, I pretty much exited the group quite quickly. But you can try to help some people.
So why you're doing what you're doing? What is your strategies like? Are you following your strategy? You know, these are all the types of questions I was asking. And to be fair, I don't mean to sound like I was picking on him, but I was just trying to get to the bottom of it's, a genuine help. What is your strategy? Say I haven't got one.
You know why you're doing it? While I'm worried about losing money, that's not a good enough reason to put a hedge on or to take the action that she was taken. And then, literally an hour later she panicked and took the position off because she was worried about losing money on the edge. You shouldn't be worrying about that on the hedge because it's a hedge ... you put a hedge on to lose money.
You hope that it doesn't work out. That's why you're doing the hedge. It's like insurance. You don't want to claim on it, but the questions surrounding it or what was concerning me, it was she didn't know why she was putting the trades on. And she couldn't answer the question and because of that she panicked and then the next thing, she was placing another trade in the opposite direction, to hedge something else that she was doing.
But there was no rhyme, no reason for it. There was no justifiable reason for doing what she was doing. And the only reason why, was because she didn't have a strategy. She didn't know why she was doing the action that she was taking and what she was hoping to accomplish with it there. Does that make sense Sean? So just a recent example that I came across.
You've got to know what you're doing, when you're doing, and why you're doing it. If you don't know those things, you do not have a plan. And it could be your turning blind can be on the back of an envelope, as long as you know those three things. What you doing, when you're doing, why you're doing it. It can be a really brief trading plan.
But as long as you've got that, then making decisions, should I have my portfolio? Well, under what city? Have you considered before, if the answer's no, then maybe you should consider sitting down and thinking about all the reasons when you should place a hedge and why you should be doing it. The first time it's going to be difficult, because you're going to be nervous, but then at least you've given it some thought.
You've thought about a contingency for when you might take a certain course of action and deal with it when the situation arises or the situation warrants it. The first time it's going to be kind of scary, because the first time you're doing it. Then the next time you do it, well, what did you do last time? Have those conditions being met?
And it frees you up from the everything that we were talking about earlier. A strategy. Having a strategy it frees up your anxiety, reduces the stress, it allows you to put the next right on, you stop being like a rabbit in the headlights. This is the experience of why you need a strategy, we were talking about some of the other reasons why you should have a bigger position size, but from a strategy point of view, it's critical to think about the things that you need to take action on, on a regular basis.
And again, it's just a very liberating experience. Even if it is just on the back of an envelope. My first strategy, for example Sean, sorry I'm going to a rumbling talking mode again. But my first strategy was buying the first pullback after moving average crossover. That was it. It was pretty simple. Take profit on an average days move.
Pretty simple. Stock plus was a fixed percentage. It was very simple. It was back at the envelope, but you know what? I traded that way for years and I made a lot of money. I did a thousand pound all the way to a nice tune of thousand and change in around about eight and a half months with that system, on the back of an envelope.
And you know what? I had high blood pressure. I'm quite certain, looking back on it, but the fact is I had a plan of action. I knew what I was doing, when I was doing it, why I was doing it. Yes, I was very green around the edges doing it, but I knew what I was doing, when I was doing it, why we're doing it. So if you need that, again, I'm banging this drum, Sean as loud as I can, but it needs to be said because the people who succeed at anything in life have a plan and how an objective.
Sean Donahoe: That's exactly it. I couldn't put it better. It's underscored, its in bold type, it's got giant bricking coats around it and neon signs and arrows pointing to it, yes. Have a trading-
Phil Newton: Do you start turning your little hands and grab the plan by the-
Sean Donahoe: By the short and curlies. Yes, let's move on.
Phil Newton: By the short and curlies. Let's move on quickly.
Sean Donahoe: Okay.
Automated: If you've got questions, they've got answers. Sean and Phil dive into the virtual mailbag for this week's rebel traders. Quick fire round.
Sean Donahoe: Okay, so jumping into the rebel trader mail here, rummaging around in the letters here and we'll see, we had a few good ones here, so I'm going to throw this one at your Phil, how much capital do you assign to a single position? And I know that is quite possibly one of the most open ended subjective questions we've ever had, but I'm going to let you tackle it.
Phil Newton: What do you want to do? And the position as small as possible. That's my kind of default answer. Try it as small as possible. You can use a percentage of your account equity. I normally suggest again around about a half percent. No more than 2%. I think 2% of your accounts equity per position is too much.
Sean Donahoe: That builds up because if you've got 20 positions that's 40% of your capital.
Phil Newton: Exactly yes. If you're trading frequently, like what I do, and then suddenly you've got a large exposure on a few small positions, which is what we're trying to avoid, which we mentioned earlier. Small as possible, trade more frequently, so that small position size allows you to trade more frequently without any additional risk to your accounts.
So as smallest possible. Another way of thinking about it because if you've got a smaller account, maybe a percentage of your accounts not realistic. I usually suggest for people to think of a number, pick a number. I'm not going to do a magic show, don't worry about it. But think of a number. What's the number that you're happy with it?
Everyone's got a number. It doesn't matter about your personal net worth. You could have a multimillion dollar accounts or a $5,000 account. Everyone's got a number that they're happy with per trade. Some people are happy with $50, some people are happy with $500. Watch your number, so that's what I would normally say to start, rather than thinking about a percentage.
And the reason why I suggest people to think of a number as opposed to a percentage of their accounts, is because practically you might be able to risk 500 or 1000 or a few thousand dollars per position and still have a small percentage. But psychologically, that might be too big, so you've not just got your practical equity in your accounts. You've also got your psychological bank balance.
Your psychological bank balance is usually very different from your practical ability to trade a percentage or a few thousand dollars per position. There's usually very different locations. So think of a number because you've got to build your psychological bank balance up, so that it matches your actual ability to risk a certain percentage per account. When those two things happen, then you can start to think about a percentage of your accounts equity that. That's what I would typically suggest. So a couple Scenarios for that.
Sean Donahoe: Perfect. Okay, and I couldn't agree more. I mean, I recommended percentage approach, just because I like to have a linear, methodical, almost algorithmic approach to trading. So again, what I do is ... a prime example of what we were talking about earlier was, I focus on about one to 2% depending on the position. I had different criteria, and I'll go higher.
And then what I'll do is, I'll have another strategy that when it lines up, and I see a prime opportunity, and again, it happens once a week, twice a week. Then those ones get an automatic 5% allocation, but again, that's because I've methodically analyze that these are prime opportunities. That don't come up very often-
Phil Newton: Strangely, Sean. Have you by chance get thought about that and put a contingency in your trading plan for such an eventuality.
Sean Donahoe: I may just have. We have a branch on that. That is, if this then that, boom 5%. But again, it's methodical. It's part and event adapted trading plan that has evolved over time based on observations, testing, and everything else that it became a consistent part of that. But I had the ability because I had an allocation in my portfolio for testing.
That was purely for, "Okay, I don't know if this is going to work or on paper it sounds like it's good."
Phil Newton: Discretionary trading, we might call that.
Sean Donahoe: Exactly, it's purely discretionary until it's not discretionary.
Phil Newton: Until it's proven not, yes?
Sean Donahoe: That's the point I'm trying to make here.
Phil Newton: I think that ... but then not everyday trades to add there every so often. So maybe it's not a swing for the fence occasion. Maybe it's ... I could maybe get to forth base on this one. It's not a swing for the fence, but I could get a good swing out of it maybe. It's a situational type of discretionary events.
Sean Donahoe: You can tell it's not a baseball person because of-
Phil Newton: I know I was struggling with the analogy.
Sean Donahoe: Yes, that's because I thought third base maybe.
Phil Newton: It's just not cricket-
Sean Donahoe: Basically into your home and that's it, you've got a home run.
Phil Newton: You know what, I speak English, you speak American. I'm trying to cross the language barrier here.
Sean Donahoe: It's all good, it's all good. But there you go, but no, it's exactly it. Third base and you-
Phil Newton: It's just not Cricket goddamn it.
Sean Donahoe: Absolutely, yes. Just watch out for that middle weekend. Anyway, so with that being said, euphemism, I will not explain because it's dirty. Anyway, so who else is in the mail box.
Phil Newton: Why break the habit of a lifetime? Anyway, so how much more money do you think you would make if you traded for more than an hour a day?
Sean Donahoe: Oh, that's an interesting question.
Phil Newton: It is because we advocate I think for 60 minutes.
Sean Donahoe: We always say that yes, we had to trade like 30 to 60 minutes a day, but, and we always say, we don't want to be glued to the screen, so how much more money do I think I could make if I was doing more than one hour? Honestly, I'd probably lose money. I would ... Here's the thing, for the particular type of trading that we do, and again, it's optimized. There's a phrase I stole from Phil, but it took 20 years to make it this simple.
We really have optimized, made our trading that efficient, that we don't need to be sat in front of the screen all day. The problem is, and I want to use an old adage here, you know, it's like, idle hands, are the devil's work. The problem is if I'm sat in front of the trading screens. I'm going to force myself to find new trades or do more.
Phil Newton: You'll start trading more discretion, I would imagine.
Sean Donahoe: Yes, exactly and-
Phil Newton: More shoot from the hip discretion, I'll just put this trade on and see what ... you'll start doing more of those.
Sean Donahoe: And that presents more risks. I don't need to be hovering around the screams all day. I don't need to do that and it's one of the ... I'd probably spend more time on strategy development, and ... which I do anyway because I enjoy it.
Phil Newton: I've got to admit Sean. I was 12 years a day trader. Most of my time, day trading was spent waiting, waiting for the trade to set up or when the actual act of putting the trade on was at click, it's done. It's seconds. If you take any time, maybe minutes, the point is that you're going to wait for the trade to set up. You're going to put the trade on, a few minutes or two at most and then you're gonna wait for it to run to its conclusion.
So you can spend hours sitting there, doing nothing and that's why people don't make a success of trading more from a time point of view.
Sean Donahoe: It's really become a rule set of mine, is to trade in the most efficient way possible. Not just from my capital, but also from my time, which is the most valuable resource we have. Okay, how much more money, you've got multimillion dollars.
Phil Newton: We've all got the same amount of time.
Sean Donahoe: Well, yes, exactly. You know time is a final resource. So to me-
Phil Newton: For example Sean, when we finished here, I shall be going not to the ball Sean, not to the ball. I shall be going to the coffee shop. I shall be taking a good book with me. I shall be taking my iPod, shuffle thing, Watsu, whatever that's called these days. And I shall be doing something else more productive with my time, than watching price dance up and down. Because my trading is done for the day, as you heard earlier.
Sean Donahoe: Absolutely.
Phil Newton: So don't trade on, I'm going to do something else.
Sean Donahoe: That's it. I'm going to the gym. I'm going to work my fat ass out and continue my physical therapy.
Phil Newton: And believe me that's ass is fat.
Sean Donahoe: Thank you. Thank you, thank you, thank you I appreciate.
Phil Newton: Oh, you're most welcome, Sean.
Sean Donahoe: But yes, anyway, I'll be working on ... just for everyone's just-
Phil Newton: You need to have been working out, haven't you?
Sean Donahoe: I have been working it. I mean twerking.
Phil Newton: Twerking maybe.
Sean Donahoe: Twerking, that's the whole thing.
Phil Newton: That's a combination of working and trading.
Sean Donahoe: Twerking to a plan, there you go. Anyway, let's get back on track for a second if we can, but yes, the end of the day. I think if I'm in front of the screens a lot more, I'm going to take more of those discretionary risky trades. Because you'd get bored. You're bored, and you're like ... and they don't work out. If it gets more risk and you know what to me, I don't need to. I really don't need to.
I think if I was in front of it more, I'd work more and more algorithms, work more on my testing side of things such as-
Phil Newton: Research, develop.
Sean Donahoe: Research and development, which is what I do anyway. When I do have, and I actually dedicate time every single week, again, you guys know I run a lot of different businesses. But I do dedicate a lot of time in a week to that already. I really don't need to.
I think if I was in front of it more, I'd work more on my algorithms, work more my testing side of research and development, which is what I do anyway. When I do have ... and I actually dedicate time every single week and you guys know I run a lot of different businesses, but I do dedicate a lot of time in a week to that already.
So again, it's just going to add more risk, more discretion and speculation in my trades and I don't need that. Because again, ultimately, I think that's going to hurt my portfolio. We've got this process so refined and efficient that we really, really, truly do not to. Okay, question for you. We've got a lot of different good questions here today. And I think these are very poignant.
Phil Newton: I know we got a nice little part.
Sean Donahoe: In reality, how much capital do you need to trade the markets efficiently? Now, I think the optimal word here is efficient, because you can start off with very small amounts, but efficient trading is a completely different kettle of fish. What would your number be?
Phil Newton: You can get away with about ... well I know I can do it with a 1000 because I turned a 1000 to 92 and a half and change in eight months. I know I can do that and I'm partly through it ... It was a long time ago.
Sean Donahoe: That was a long number of years ago and you could probably do it faster now.
Phil Newton: Yes, well actually it's slower so far but yes, because I'm a little bit more cautious than I was then. I was taking unnecessary risk back then. Looking back on it, I didn't know at the time it was unnecessary risk, but I'm actually replicating it so far. Again, I'm going to take a $1000 to 100,000 in 12 months and I'm partway through that. That's what I'm doing this year.
That's my own little personal project and that that kind of strength to, can I repeat the process that I used with the strategies and methodologies that I know today. So, I'm partway through that process. So, can you get away with getting ... what can you really start with to grow? 5 to $10,000 would be a doable without taking unnecessary risk, but still being able to apply this portfolio approach that I'm always talking about anyway.
You can certainly do that. Your growth on your account is going to be slow just because of the way that you might need to trade to keep the per trade risks small that we were talking about earlier. You're probably going to be looking at debit spreads and credit spreads, and just to keep the risks small so that as a result means that your profit is going to be a small book consistence as well.
So again, you can start with a small account is all I'm trying to suggest, but just understand because of that your growth is going to be slow.
Sean Donahoe: That makes sense. And I would say yes. 5 to 10K would be a minimum. It's doable, it's doable.
Phil Newton: It's doable, it's doable. It's not ideal, but it's doable. I think if I could put a figure on kind of like a good start point for a business. Again, if we were thinking about this as a business rather than ... because 5 to 10 grand, it sounds more like side gig. If you're going to do this as a business and go at it as a business, you're looking at a $100,000 or more to be able to deploy strategies effectively and money management and all the risk parameters and account growth and compounding and all the things that would go into a multi-strategy multi-position approach.
We've kind of been talking about this most of this episode. I think if I had my minimum perfect scenario then a 100 grand would be great because I know that I can turn a 100 grand into half a million in two years without compounding.
Sean Donahoe: Yes, very, very efficiently. Now we haven't even got ... We might do an entire dedicated show on the power of compounding because that is one of the most powerful things you can do.
Phil Newton: Well without compounding, it's an impressive results, with compounding. You're looking at two, three million a year. You know it's easy to do when you've got the means to do it. And to be fair, I don't want to sound like I'm bragging, but that's true of any business. Let's just take it to the real world for a moment and not just the trading universe, which is a very small segment of the real world.
But if you try to start a business in the real world, if you've got $5,000 versus $100,000 you can do more with $100,000 than you can $5,000. Or go which would you rather start with? Maybe you delay your starting date for your trading or your business so that you can get the finance and funding to start with the higher dollar accounts, the $100,000.
Maybe you wait and do other things so that you can start the trading with the bigger money because it's doable as you've said, but it's going to be difficult. Just like it would be difficult to start a business with $5,000. You can do it, but you've got less flexibility, especially as a new trader if you cock up somewhere.
Sean Donahoe: Absolutely. No, that's pretty much put nails in it. I like it. So with that being said, let's rock on.
Automated: Don't forget if you have a question you want to ask Sean and Phil, just go to and your question may be featured on a future show. Uh oh, what's that smell? It's time to call out the Wall Street Shenanigans mainstream confusion and outright high jinks and Hokum of so called experts. Yes, it's time for bullshit of the week.
Sean Donahoe: Okay, so bullshit of the week and I'll be honest, we were struggling to find some BS this week. Everyone's pretty much behaving.
Phil Newton: Well to be fair, I think Phil's backed into a few holes this week. If this thing piles up to the end of this week, I might not qualify. Phil's doing it again.
Sean Donahoe: A little bit.
Phil Newton: Phil's doing it again.
Sean Donahoe: There you are. That should be subject to the BS of the week. That would be funny, but I'm going to do that to you. I'm going to pick on Mark Zuckerberg instead. So, the one that did strike me this morning as I was looking through all the market news and everything else, we all know that Zuckerberg has been under the spotlight slightly.
Phil Newton: And I wasn't that forehead shiny.
Sean Donahoe: Indeed, this was self-moderating bullshit. So, in an effort to regain and rebuild trust with the markets, with investors and with the users of the social media platform that is Facebook. He has decided that he's going to put ... basically they going to rank every news agency as whether they're trustworthy adult. Now they've been going through different efforts to do all this.
So, whether you've heard of this news agency or this is an effort to combat fake news, this is one thing they're doing. So, they're doing it, "Hey, have you heard of this? Is it a credible source?" And crowdsourcing basically, yes or no. Is this a valid platform or new story of what have you? So, okay, you know what? They got to do something here, but here's where it gets-
Phil Newton: More specifically, you've got to be seen to be doing something.
Sean Donahoe: Yes.
Phil Newton: Because in fairness they had done something about the data breach thing, but no one had seen them do anything about it. And that's the difference here. They've got to be seen doing something about it.
Sean Donahoe: This is a very visual approach and a very loud approach for the markets, and for the populous in general. They've also on every post now added a thing where it says, does this post contain hate speech? Yes or no? Now again, very binary approach to the process, but if you post something that says, you know, anything that could be political.
Anything that anyone could disagree with or think is outside of their belief structure, what have you, they could report you, and if you get enough reports or they could ... And this is what I'm seeing is happening, is people are going to start doing basically thought bumming.
So if I disagree, well, I'm going to post this in my group with everyone else who disagrees with me, share this link and get everyone to basically knock this post off and then get your account flagged, and then possibly get you banned from Facebook. Because you've got-
Phil Newton: Thought police.
Sean Donahoe: Again, one of the things that ... I mean really is the thought police here, because here's the thing. This is your ultimate safe space and cry box for people right now. Oh, I disagree with you and I've got to say that you have this, and then I'm going to go get everyone else to bomb you for this, it's ridiculous. Now again, I'm conflicted on this one for two reasons. First of all, it's a private business.
Facebook is not a public business. It's a private business that serves the public.
Phil Newton: We seel ads center.
Sean Donahoe: Well, exactly. Very much so, and I use Facebook for business, for ads and everything else. In fact, their whole thing about, "Oh, how much data, where'd you get all your data from?" I love it because I use it for my advertising. But at the end of the day, it's a private business and they're entitled to run their private business the way they want.
We have obviously the first amendment here in the US where you can say whatever you want without fear of infringement by the government, because you have the right to free speech. That doesn't extend.
Phil Newton: As long as you're not inciting hate and violence.
Sean Donahoe: Well, there are some conditional laws in regards to that.
Phil Newton: We'd like to just add common sense here, yes. As long as you're not being a dick, you can say pretty much whatever you want.
Sean Donahoe: No, you can be a complete dick and say what you want without fear of infringement by the government.
Phil Newton: Well that's true as well.
Sean Donahoe: But here's the thing. That's the whole point is protected first amendment speech. Even if you completely disagree and there's a lot of people I completely disagree with.
Phil Newton: I'm offended Sean.
Sean Donahoe: But it doesn't extend Facebook.
Phil Newton: You'll be banned for being offended.
Sean Donahoe: It doesn't expand to a private company and that's the important thing. So while I think it's absolutely bullshit that they're trying ... you know, the opening it up to public to moderate each other and then there's this inherent risk of people-
Phil Newton: Some being offended.
Sean Donahoe: And people being just generally offended. And this is where the first amendment-
Phil Newton: Which is assumed common trend.
Sean Donahoe: It is. Everyone's offended by everything. So those was one of the reasons I don't participate in a lot of these discussions, but certainly the controversial ones because no one needs my opinion. My opinion is mine and I don't feel the need.
Phil Newton: My personal is mine and I'm right.
Sean Donahoe: Exactly, my opinion is always right, but I don't need to stand on a mountain shouting it and shouting down other people who have stood on their mountain. You just want to stand on your mountain, that's fine. I'm quite comfortable where I am. I don't need justify my wife.
Phil Newton: I don't need self validation. No.
Sean Donahoe: So again, I think a lot of it is narcissistic and a little bit-
Phil Newton: It's not that it needs to be done, which makes it bullshit.
Sean Donahoe: It does, and you know, so it's a conflicted thing. And like I said, it was cut as on one hand it's bullshit, on the other hand, it's a private company they can do what they want.
Phil Newton: Good and bad, depending on your perspective. I see why it's been done. For the most part, if it's used in the way that it's intended, it's going to be useful because there's a lot of bullshit out there that does need reporting, so this is a way of self moderating. But it's sadly-
Sean Donahoe: It's a measuring stick of our society.
Phil Newton: Yes, it's an overreaction to something that should never have got this far in the first place.
Sean Donahoe: And it really is more of a measuring stick of society and culture into my mind as well.
Phil Newton: It's that.
Sean Donahoe: But there you go.
Phil Newton: A little Equilibrium was the movie.
Sean Donahoe: Equilibrium. I've not seen that.
Phil Newton: Yes, 2002 good film. Basically it's about ... I was going to say a Utopian Society, but it's not, it's a futuristic society of where you are literally ... your thoughts are controlled, very 1984 ish.
Sean Donahoe: I'm going to have to go check that out.
Phil Newton: It's a good movie actually. It's a good movie. It didn't get the accolades that it deserved at the time.
Sean Donahoe: Sorry what was it called?
Phil Newton: Equilibrium.
Sean Donahoe: Equilibrium
Phil Newton: Yes. It didn't get the accolades that it deserved. There's lots of other movies that were pretty decent around at the same time, but that one just kind of flew past the Oscar doors.
Sean Donahoe: Dear me, I like it. Now I've got to ask, just because we've mentioned Christian Bale.
Phil Newton: I like Christian Bale as an actor generally anyway.
Sean Donahoe: Do you like him as Batman? Do you still think he was good as Batman.
Phil Newton: I liked him as Batman. I really did. But then as an actor, I've seen him grow up on screen from the Empire of the Sun, way back in the late 70s. That was kind of like my first exposure to me. I just like him. He's a good actor.
Sean Donahoe: I think he's a dick in real life.
Phil Newton: I've never met him in real life, so I wouldn't be able to comment.
Sean Donahoe: Well, okay. Yes, he has a tendency to temper tantrums, but I do appreciate him as Batman I think. I think to my mind he was the Best Batman so far.
Phil Newton: He was the other guy that did ... The guy that did Gladiator, he had temper tantrums. Didn't he?
Sean Donahoe: Russell Crowe?
Phil Newton: Yes.
Sean Donahoe: He's got a bit of a temper.
Phil Newton: He is difficult to work with. I think it's how they phrase it these days.
Sean Donahoe: That's a polite way of saying it, yes, indeed but there you go.
Phil Newton: Committed to the role on and off stage. Of what? Being a dick? Yes, that's the one.
Sean Donahoe: Anyway, with that being said, that's it for this week's show as we ramble on about movies, but this is what we do. We enjoy it. We love it every week, and we thank you for listening to the show. Please remember that this show is not free. There is a little bit of a custom we ask you only for your donation of a five star review. Just go to the Rebel Trader or where you can subscribe.
Make sure you catch us every single week and review us on your favorite way to hear this show. This helps us reach more investors and traders just like you and get this message out there which as you can see is pretty bloody important.
Phil Newton: Now you can also connect with us on the Twitter machine and flake book, just follow the same link. Go to And you can self-select where you would like to join us on social media. As you've got the wind I'm not going to be on Facebook, so you can probably write a postcard, and send it by pigeon.
Sean Donahoe: Absolutely. Send it by a pigeon or get one of those sign writers to go in the sky.
Phil Newton: Get the clocks machine on the go.
Sean Donahoe: Absolutely. And speaking of plaques and we got a little tongue in cheek stuff here. Next week we're going to be talking Carpe Jugulum. You could be talking about Carpe diem or what have you, but no, we're going to go Carpe Jugulum and we're going to seize the throat. It's a Terry Pratchett reference.
We're going to have a little bit of fun with that, but we're going to be talking about how to identify and seize opportunities in the most efficient way possible.We're going to be looking at a few different ideas, strategies and plenty of Terry Pratchettisms will be flying, so if you are a fan of the author, as we both are we're going to have a wee bit of fun with it.
Phil Newton: All things comedy writing.
Sean Donahoe: Absolutely. So, save that for next week, until then, take care for now.
Phil Newton: Bye for now.
Automated: For more cutting-edge trading advice and a free trader workshop to help you build a personalized trading plan and make smarter trading decisions, go to now.
Automated: Futures, options on futures stock and stock options trading involves a substantial degree of risk. It may not be suitable for all investors. Past performance is not necessarily indicative of future results. Trade Canyon Incorporated provides only training and educational information. If you actually understood and listened to this, then that means you are awesome. Congratulations and well done. Notice, this product may contain nuts.

(Click the time stamp to jump directly to that point in the episode.)

[00:07] Show Introduction

[01:29] Sean: We recommend having a much bigger and diverse basket and how you can optimize your portfolio and take advantage of the different market conditions that are out there.

[02:20] Sean: It’s one of the biggest pitfalls that people unintentionally fall into. They’re tying up a lot of their capital.

[02:48] Phil: There are strategies to have one or two positions with large positions but the people who use them typically understand what they are doing. The problem is people who don’t know what they are doing using too big a position size and hoping for the best which is most new traders.

[03:12] Sean: We’ve all done it.

[03:19] Phil: It’s learning from it quite quickly is what separates most people.

[03:25] Sean: Those lessons come at a very high cost, quite literally, figuratively, and emotionally.

[04:44] Phil: We’re talking about the everyday trader that putting one trade on with as big a position size under normal circumstances and hoping it works out.

[05:48] Sean: If you only hit one three out of every ten pitches made at you, you’re a ‘Hall of Famer’. You’re not going to hit a home run every swing.

[06:30] Sean: One of the strategies we advocate, especially for a new trader is trade smaller and trade more. One trade a day, it’s got to be the right trade and meet strategy requirements. What are the reasons for trading smaller, Phil?

[06:50] Phil: There are a whole host of reasons. It’s stress free, by reducing your position size it gives you a high degree of emotional clarity. You’ve got less exposure on a per trade basis then you can start looking for the next position.

[11:19] Sean: Trading smaller and trading more allows us to efficiently use our capital. I want lots of positions with lots of potential in a diversified portfolio, but ultimately I want my money to work smart.

[12:45] Phil: We’ve got multiple streams of income; we’ve got lots potential revenue streams from lots of trading occurrences.

[13:10] Sean: One of the things we do is keep a percentage of capital at one side that is not put into the markets so that we can trade next week, month, or year. The reason we only keep a certain percentage in the markets is so that if a big world event happens and you’re starting again then we still have capital there.

[14:32] Phil: If everything you choose goes down the toilet, you’re still in business.

[16:16] Phil: There’s going to be a couple of times a year occurrence or maybe a once in a decade occurrence where there is a swing for the fence opportunity, you’ve got a 50% cash reserve that you can do something with.

[18:15] Sean: Different market conditions may require different strategies. It’s good to have multiple baskets with everything sorted out so it’s easier to track.

[19:48] Phil: The application of that is very simple, at least the way I teach it. If you’re reducing your position size, and you’ve got a strategy in place then the third key component is to trade more frequently.

[21:32] Sean: If a market condition is changing and you have everything in one basket it’s really hard to see when certain positions are doing certain things. If you’ve got it organized, it can be an early indicator of a market change.

[25:27] Sean: What would you say is the most important thing to see in your in terms of information in your portfolio summaries?

[25:56] Sean: I’m looking at, firstly, the basic information, what stock am I trading, what strike am I buying, what price did I get? All that information is in your brokerage so in addition I need strategy information so I can make sensible adjustments.

[29:23] Sean: Sometimes, the portfolio management software is not enough; we have to have a separate log.

[29:31] Phil: I use a spreadsheet.

[30:11] Sean: I keep it in a separate spreadsheet along with my emotional state, why I got in the trade. Yes, you should have a trading log!

[32:43] Phil: Mostly, I’m a buyer of options, if it’s in a losing state you’re wrong, don’t roll it, just cut it, and move on.

[33:44] Sean: The other thing we do on our portfolios is delta weighting. Now, we want to measure our portfolio balance and we’re looking at measuring against the general markets.

[37:25] Sean: We look at the markets every single day, we’ve got our positions rockin’ and rollin’ but we don’t want a lot of risk. We’re conservative with our risk but we have a lot of strategies that we use that give us the maximum upside.

[39:24] Sean: If you’re not tracking, it’s hard to see the dead weight I’m your portfolio. Phil, what would you say in regards to dead weight?

[40:15] Phil: The phrase is ‘cut your losses and run your winners’ but it depends.

[41:30] Phil: For the winners, I set targets and when it gets to where I think it’s going, I’m closing.

[44:35] Sean: Two last points I want to make - when you have a portfolio, a basket of stocks you should be measuring everything and tracking everything again your trading plan.

[47:24] Sean: It is vitality important for making sure you have not only the ability to thrive in the markets but survive. Phil, any last words on this?

[47:42] Phil: Trade smaller, trade more frequently, have a trading plan.

[48:00] Rebel Trader Tip of the Week

[48:30] Sean: It’s not just a trading plan, it’s a business plan. You need to have that kind of mindset.

[48:39] Phil: It’s your financial blueprint.

[48:56] Sean: Think about McDonald’s, it’s a multi-million dollar company ran by teenagers who all work to a system that bullet points everything they do every day down to the letter. This process is the guiding light for your business so make sure you develop a business plan.

[52:04] Phil: You’ve got to know what you’re doing, when you’re doing it, and why you’re doing it and if you don’t know Jose things you don’t have a plan.

[55:55] Quickfire Round

[56:14] Sean: How much capital do you assign to a single position?

[56:28] Phil: My default answer, trade as small as possible. You can use a percentage of your account equity. I normally suggest around half percent, no more than two percent per position.

[56:47] If you’ve got twenty positions, that’s forty percent of your capital.

[57:18] Phil: I usually suggest for people to think of a number they are happy with per trade. That’s what I would say to start rather than a percentage.

[1:01:12] How much more money do you think you would make if you traded more than one hour a day?

[1:01:32] Sean: Honestly, I’d probably lose money. The trading I do, it’s optimized so we don’t need to be sat in front of the screen all day. If I’m sat in front of the trading screens I’m going to force myself to find new trades.

[1:03:55] Phil: I’m going to do something more productive with my time than watching price dance up and down because my trading is done for the day.

[1:05:48] In reality, how much capital do you need to trade the markets efficiently?

[1:06:00] Sean: Efficient trading is a completely different kettle of fish, what would your number be?

[1:06:07] Phil: You can get away with about $1000, as I turned it into $92,500 in eight months. Five to ten thousand dollars would be doable without taking unnecessary risks.

[1:07:43] Sean: I would say yeah, 5-10k would be a minimum.

[1:07:56] Phil: If I could put a figure on as a business, you’re looking at the $100,000 mark.

[1:10:25] Bulls**t of the Week

[1:10:57] Sean: We all know Zuckerberg’s has been under spotlights recently. This was self-moderating bulls**t. In an effort to rebuild trust and regain markets with investors and users of the Facebook, he has decided they are going to rank every news agency whether they are trustworthy or not.

[1:11:56] Phil: More specifically, they’ve got to be seen to be doing something.

[1:13:31] Sean: I’m conflicted on this one, it’s a private business that serves the public and I use Facebook for ads and everything else.

[1:16:03] Phil: I see why it’s being done, if it’s used on the way it’s intended it’s going to be useful.

[1:18:12] Sean: That’s it for this week. Thank you for listening to the show! There is a little bit of a cost, we ask you for a donation of a five-star review. Go to where you can subscribe and review us on your favourite way to reach the show. This helps us reach more traders and investors just like you.

[1:18:43] Phil - you can also connect with us on the Twitter machine and Facebook at the same link.

[1:19:14] Sean: Next week we’re going to be talking ‘carpe jugulum’.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • Trade smaller, trade more and mitigate risk
  • Organize your portfolio based on strategy and use it to track performance
  • Your the CFO of your trading business and having a good portfolio is your real-time business ledger

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