Grading Setups To Increase Sizing

How to press on the best

The market ebbs and flows with opportunities. The skill lies in the ability to dance between the moments to take action and those to remain still.

It was a week of patience in the build-up to the FOMC. As a Trader, sitting on the sidelines is a position of strength. You don’t have to play. Being short-term frees you from needing to “predict” outcomes, hold a view, or maintain a position.

This vantage point enables the mental capacity to swing for it when something meaningful presents itself.

Indeed, from my observation, it is this capability and mindset shift that defines the best traders. They play to win. They can recognise the “see-it” moment through constant immersion to bet exponentially in the very best hands. Sizing up seems to come naturally. I voiced this in a tweet last week here.

It was this great response from @BrianLeeTrades on exponential sizing that got me thinking deeper:

I think it depends on your strategy and if it takes into repeatable edge category or the unique situation category

I think he raises 2 key problems faced by discretionary traders:

1. How do you grade or identify the best hands vs. repeatable ones without hindsight?

2. If it is a unique situation category, how do you bet exponentially?

These are the points I want to address in this week’s newsletter below.

**Some admin before I continue. I have begun sending my report cards at the end of the trading day to the Member’s Substack Chat. If you haven’t already, sign up for timely access to these updates and reviews here.

Now let’s dive in…….

Winners Play To Win

Throughout my career, the month and year have been made by a few outlier winners.

Your best trading days will come from your ability to be aggressive in the right conditions.

This is what defines those who are playing to win. They don’t struggle to pull the trigger because they’re focused on the opportunity. They focus on success. There's no second-guessing - they know exactly what they're looking for and act without fear. The priority is to take the opportunity and deal with the aftermath later.

Pressing hard can mean:

• Taking on more risk

• Pyramiding into positions

• Extending the normal targets or range to extract more from the trade.

Any of these options can leverage the scenario.

Where does this self-assurance come from? I believe part of it is innate. Some characters just feel comfortable putting on risk. It is natural to them. Their brains are wired to fight instead of flight. They thrive in stressful conditions.

Fortunately, I believe this confidence can also be trained.

Know Your Best Plays Deeply

The best way to initiate the mental shift to playing to win is to develop a deep understanding of your setups.

Confidence comes from practice and building an underlying strategy through constant screen time, immersion, testing, and just figuring it out.

No doubt there is a natural cycle at play here. The trader needs to move up the different levels of the game in stages. At first, the beginner needs to form an edge and play great defense so as not to lose. Risking too much without solid knowledge and a cushion will blow the account. Not good. Furthermore, it can be extremely damaging psychologically to take outsized losses. There is often no coming back from that situation.

It is only after a solid foundation is built, that you can go up to the next level for a more aggressive mindset.

Once you are confident in your ability and have found an edge, maximize it by going deep. 80% of profits will come from just 20% of trades. Spend your time and energy identifying the commonalities behind these best trades. Furthermore, what are the major contributors to your best performances?

I spend hours writing up the best opportunities each day and month to internalise this process.

The goal is to define the repeatable factors that Brian talks about into a system. And then improve them. This can be aided through grading.

Grading

A grading process helps to put all the variables of the puzzle together.

The most common question I receive is how I go about grading the quality of a trade as a discretionary trader. No doubt there is an element of subjectivity, nuance and feel. I am sure many readers here are in a similar boat.

The answer is that I like to think of myself as a hybrid and run multiple systems. The goal is to get to a point where you can use stats, tools, and automation per playbook. I have had enormous help in this regard from fellow traders and quants to build the infrastructure. The model spits out a grading score per strategy and off I go.

As an example, let’s take a system that requires a lot of discretion, such as a stocks-in-play “morning drive”. The key is to identify your most important variables and weigh them accordingly. You could grade 1) The Catalyst 2) The Pattern 3) The Market Conditions. Summarise and allocate risk buckets accordingly. Building a rigid process also enables you to look back and see whether you have an edge or where your thinking fell short.

Possible factors:

• What is the magnitude of the news event? Can it be quantified?

• Is it one-off or long-lasting?

• Do I have an information edge via research?

• Has the stock run up or down into the news? Is it extended or at equilibrium?

• How liquid is the stock for me to push size and manage risk?

• Where are the major orders? Is the book screaming strong or weak?

• Is there a price where the trade offers value?

• What patterns signify I am right? What would show me I am wrong?

• Do I trade early or wait?

• Does this pattern align with my strengths?

• Is the broader market strong or weak? Are these plays being rewarded?

• Is this stock in a strong or weak sector?

Weighing and answering some of these variables makes your decision-making more robust. The goal is NOT to overanalyze but to build a framework. You can better identify the repeatable and what may be outlier unique events through time and reps.

Think About Uniqueness

Now to circle back on Brian’s question - what would make something unique to me?

I love this thought process and it is something I want to be more conscious of in real time.

Factors that could lead me to upgrade a thesis to a special situation include:

• a catalyst so big that it needs time and price to be digested

• a news event that is breaking and has not been widely circulated

• an earnings update that will lead to significant revisions from the consensus

• a powerful message on the tape

• a substantial order flow

• a move that becomes extended beyond historical norms

These are all the nuances where I want to be more aggressive within my playbook and go for it. I failed to think about one of these variables in my $SVL trade earlier in the week. It fits the unique criteria.

This needs more risk.

Putting It All Together

Let’s be clear- some of the best discretionary traders I have witnessed like Lance, Bryce, or James may not be using a live grading system or model.

It isn’t for everyone.

Their strength comes from drawing upon their past trades and recognising truly favourable risk/reward conditions in the moment to scale up aggressively. They have built their own mental maps and systemized them.

This comes from experience and repetition.

It comes from deep game planning and pattern recognition.

It comes from hard work.

It comes from seeing something meaningful on the tape in real time.

It comes from understanding uniqueness.

It comes from their willingness to play to win.

It does NOT come from a stock breaking above a line on a chart.

It does NOT come from sitting there and seeing what comes up.

There is no right answer for everyone. Take what works for you and discard the rest. The goal is to get to a point where you can really identify your edge and whether this is a unique situation. They are rare but they MUST be maximised.

When you're in your best setups, ask yourself...

Am I big enough here?

Conclusion

Growing size is a skill that takes time and practice.

I am way off from where I want and need to be in this regard. Writing this post has reinforced the areas I need to work on with focus.

In part 2 of this post, I will go deeper and offer a framework for increasing sizing exponentially.

Stay tuned