Day Trading: How to Scale-Up (Increase Your Size) Responsibly

Alex Niemi
8 min readApr 26, 2023

When I started trading, which was quite a while ago, it took a lot of effort and a long time before I started to see some progress and an upward-sloping equity curve. Like most people, I started out trading a one-lot (initially on the ES and crude, and then on bonds and notes). Once I started being profitable, I had trouble figuring when I should scale-up, how quickly I should do so, and when I should reduce my size (e.g. if things weren’t going right). I asked a lot of “gurus” that I knew/followed at the time and nobody had a good answer for me.

The most common response was to scale your size with your confidence level in the trade. I found that to be useless because the outcome of any individual trade that I took had no correlation to my confidence in the trade prior to entry -I know that because I recorded my “confidence level” in each trade (for a large number of trades over a large period of time) and regressed the P&L of each of the individual trades on their respective confidence level. No correlation. This makes sense because discretionary trading, contrary to popular belief, is probabilistic by nature, rather than statistical. It is NOT a case where you’re the casino and your edge plays out over a long period of time… but, more on that in a future article. For now, I’ll get to the gist.

Earn Your Size

The fundamental concept is that you should earn the right to increase your size. You do this by executing a profitable sequence of trades, and once you’ve accumulated a specific number of ticks in profit, you scale-up by a predefined amount. All of this is quantifiable and I’ll demonstrate by way of example below.

Step 1: Quantify Your Typical “Bad Run”

A bad run is a sequence of trades that results in a cumulative net-negative P&L of a certain number of ticks.

For me, a bad run is 12 ticks. Note: one tick is the minimum increment for any/all market(s); the dollar-value of a tick is, of course, market dependent. But, it doesn’t matter in these calculations. You should ALWAYS consider your P&L in ticks, NOT DOLLARS. So, a bad run for me looks like four consecutive 3-tick losers. Or, it could be three consecutive 4-tick losers. It doesn’t have to consist of consecutive losers; e.g. it could also look like the following trade sequence (number of ticks profit/trade): 0, -5, +3, -3, 0, -4, +2, +1, -4, -2. Sum = -12 ticks. Basically, a bad run for me is anytime I have a drawdown equal to or greater than 12 ticks after some number of trades. At that point, I stop trading for the week (even if it’s Monday), and I use the rest of the week to analyze my trades and figure out what’s going wrong and why I’m out of sync with the markets.

As another example, let’s say that you’re trading equities outright and that you focus on relatively stable (non-volatile) mid-cap companies that typically have a price in the $10–30/share range. Let’s say that your strategy is to capture intraday volatility and that a bad trade for you means losing $0.40/share. Furthermore, we’ll assume that something has gone wrong with your trading (or the markets) if you’ve had a sequence of trades that are equivalent to five losers in a row, each having a $0.40/share loss. Thus, the number of ticks in your bad run (i.e. your drawdown) is 200 ticks (because each tick on the stocks that you trade is equal to one cent).

Step 2: Calculate Number of Ticks Required to Scale-Up to the Next Size Desired

Let’s say that I’m currently trading a one-lot (one contract) and that I want to trade two contracts. How do I get there?

I know that there’s a chance I’ll have a bad run when I’m [eventually] trading two contracts. Given that my “bad run” is 12 ticks (per contract), it will amount to 24 ticks total loss if I’m trading two contracts:

2 contracts * 12 ticks/contract = 24 ticks

That gives me my goal: I have to earn 24 ticks in profit while trading one contract. So, I continue trading my one-lot until I have a sequence of trades resulting in a cumulative profit of 24 ticks. As an example, I’d need the equivalent of three 8-tick winning trades.

Now, it may take me a while to get there… it may take me weeks or months (or longer). And I’ll likely have many bad runs along the way. Each time I have a bad run, I stop for the week and use the rest of the time to reflect and evaluate my trades. After each bad run, I start a new sequence with my P&L reset to zero. I continue trying to earn my 24 ticks in order to scale-up in each new sequence of trades (after a previous bad run). Note: if you experience multiple bad runs in a row and find your account equity continually trending downward, then congratulations!… you’re a retail trader! All jokes aside, if something is going wrong, STOP trading and take the time to assess.

Step 3a: Trade [Well], Scale-Up, Recalculate

So, let’s say that I’ve been trading my one-lot for a few weeks, things have gone well, and as of Monday morning (today) I earned my 24 ticks in profit. Typically, I’d stop for the day at this point, and tomorrow morning (Tuesday), I’d set my size to two contracts, and get started trading. It’s important (IMO) to set your size and forget about. Otherwise, trading with bigger size (even just one more contract) tends to cause anxiety, which affects your trading. All of my DOMs are setup to reflect my profit in ticks/contract; thus, 50 contracts looks no different to me on the ladder than does 1 contract. Note: depending on your market, substantial increases in size might impact your fills, and that has to be considered.

So, now that I’m trading two contracts, let’s say that I want to scale-up to three contracts next. My calculation is as follows:

3 contracts * 12 ticks/contract = 36 ticks

So, I need to earn 36 ticks total in profit in order to move up to three contracts from two. But, I need to earn those 36 ticks (total) by trading only two contracts. Thus, per contract, I need to earn:

36 ticks / 2 contracts = 18 ticks/contract

So, my goal is to trade two contracts until I’ve earned 18 ticks/contract. Once I’ve earned those 18 ticks, I can start trading three contracts.

Step 3b: Trade [Poorly], Scale-Down, Start Again

So, let’s say that I just started trading two contracts yesterday morning (Tuesday), after having earned my 24 ticks over the past few weeks.

And, unfortunately, yesterday and today (Wednesday) were terrible days for me. I had two bad trades and a scratch yesterday in which I lost a total of 8 ticks/contract, and today I lost another 4 ticks/contract on my first trade. That’s a total of 12 ticks/contract and I hit my drawdown limit. So, I’m done trading for the week. I’ll shut down Sierra Chart and use tomorrow and Friday to review my trades without even glancing at the markets until Monday.

Obviously this sucks because my bad run cost me 24 ticks in total (12 ticks * 2 contracts) BUT the good thing is that my account equity is right back where it was when I started trading one contract. Why? Because I forced myself to earn 24 ticks (trading only one contract) before I scaled up to two contracts.

At this point, I’d start trading again on Monday with only one contract. Once again, I would force myself to earn another 24 ticks in order to scale-up to two contracts (again).

Summary

This approach is flexible. You can use the same simple arithmetic to go from one contract to two or from 20 contracts to 30. It also works both ways: scaling up or scaling down. If you’re trading a 10-lot and earn enough ticks to scale-up to a 20-lot but then have a bad run immediately after scaling up, you can drop back down to 10 contracts and your account equity is the same (minus commission and fees, of course) as it was when you started trading the 10-lot.

It prevents you from scaling up too quickly. Let’s say that you don’t use this system and that you start with a one-lot, earn 10 ticks in profit, and then scale-up to five contracts. If you have only one small two-tick losing trade (on a five-lot), then you’ve wiped out all of the profit that you made when you were trading a single contract. Now, if you take a another trade with your five-lot and lose 4 ticks on it, you’re in the hole by 20 ticks… on only two trades. This is one of the biggest challenges that new traders face when scaling up — they do it too aggressively and wipe out all of their previous profit.

It’s quantifiable and allows you to set goals. It’s a great feeling to see positive results and make progress — especially in trading. This approach allows you to set achievable and measurable goals, and track your progress towards them.

It safeguards you from times when you’re out of sync with the markets. By making sure that you earn your ticks before scaling up, it builds-in a profit buffer so that, just in case you’re not in sync with the markets shortly after scaling, you don’t consume all of your previous earnings or drawdown your account equity significantly before you reduce your size.

It gets easier as you go. Perhaps the best thing about this approach is that if you scale-up one contract at a time, the number of ticks that you have to earn (per contract) in order to move up gradually decreases. This is a logical outcome of the arithmetic because, for example, going from one contract to two represents a 200% increase in the number of contracts traded; whereas, going from four contracts to five represents only a 25% increase in the number of contracts traded. Thus, it becomes easier and easier to grow in size if you increase by one (or a modest/reasonable) number of contracts at a time.

First Note: I use the method described in this article for discretionary directional sentiment expression via intraday trading of futures (outrights and spreads). It is NOT appropriate for the following: algorithmic/quant trading, portfolio of strategies/markets, swing or position-trading (inter-day or longer durations), non-directional options & derivatives trading, hedging, or many/most other situations. Having said that, it has been valuable to me when applied within its limited scope.

Second Note: there is an assumption implicit in everything above: that you maintain sufficient capital in your trading account to cover the margin required for your positions. In other words, just because you earned N number of ticks in profit, the dollar amount of that profit may not be sufficient to cover the initial margin required to trade another contract. Margin requirements vary significantly by broker, market, and current volatility levels.

Disclaimer: I am not a financial/investment adviser, nor am I a professional trader. I’m just a guy with a 9–5 job that trades as a hobby. I am not providing advice; I am simply sharing my learnings as a retail/independent trader. Trading derivatives of any kind, especially futures, involves significant risk that is not appropriate for anyone other than experienced professionals, and you should not involve yourself in trading or expose yourself to this type of risk without consulting with and/or hiring a professional to assist you.

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Alex Niemi

I'd write more if I didn't spend all of my time coding.