Size by Grade, Not by Mooderic

This is part eleven of the ASX order book series. The previous post showed how commission drag punishes marginal trades. This one is about where to put your money instead.

Every trader whose journal I read sized by mood at the start. It's the default human behaviour: a bit bigger after a good run because you feel sharp, a lot bigger after a bad loss because you want it back. Over time, independently, they converged on the same fix: grade the setup first, then let the grade decide the size.

Why grading adds edge

Not all setups are equal. If you track your trades by quality, you'll almost certainly find that your best setups have much higher expectancy than your average ones, and your marginal setups barely break even.

Here's a synthetic example. Suppose a trader's setups break down like this:

Now compare three sizing policies, all with the same average risk per trade.

The graded policy uses the same average risk and earns about 47% more per trade. Nothing about the setups changed. The money just moved to where the edge is. Skipping B setups entirely earns almost as much with less average risk and 40% fewer trades, and it also removes their commissions, which, as the last post showed, can turn a breakeven trade into a losing one.

What makes a setup A+

The grading criteria differed between traders, but the ingredients overlapped heavily. Most were things we've covered earlier in the series.

A simple scoring approach works well: score each ingredient 0, 1 or 2, add them up, and map the total to a grade. The point isn't precision. It's forcing yourself to evaluate the trade on the same criteria every time, before you're in it.

Sizing from the grade

Once you have a grade, sizing is mechanical:

Copy risk dollars   = base R × grade multiplier
position size  = risk dollars / distance to the invalidation point
position size  = min(position size, liquidity cap)

The liquidity cap matters. Even an A+ setup can't be bigger than the book can absorb when you need to leave. That's the protection idea from earlier in the series: don't be bigger than the liquidity you're leaning on.

A common set of multipliers was something like 0.5x for B, 1x for A and 2x to 3x for A+. Some traders skipped B setups entirely during periods when they were struggling with discipline.

Grade inflation

Here's the trap. Grading only works if it's honest, and it's hardest to be honest exactly when it matters most.

Several journals described the same pattern after a strong run: every setup starts looking like an A+. Confidence is high, standards slip, size goes up across the board, and suddenly a mediocre setup is carrying triple size. If you look back after a painful loss and find you'd rated almost everything A+ for a week, that's grade inflation, and it's extremely common.

Defences against grade inflation:

• Record the grade before entry, in a journal or a spreadsheet, not afterwards.
• Review grade accuracy weekly: do your A+ trades actually outperform your A trades? If not, your grading is broken.
• Cap the number of A+ trades you allow yourself per day or per week. Real A+ setups are rare.
• Downgrade automatically after a losing day or when you notice emotional trading.

Mood sizing: the failure modes

Grading doesn't remove emotion. It gives you a rule to check emotion against.

Earning size step-ups

The other sizing question is when to increase your base size. The journals had a very consistent lesson here, learned painfully: every step up in base size triggered a relapse in discipline. Bigger numbers on the screen make losses feel worse, which makes cutting them harder, which makes them bigger.

The approaches that worked:

A template

The numbers are illustrative, not recommendations. The structure is what matters: size is a decision made by rules before the trade, not by feelings during it.