What horse betting and position sizing have in common

Episode 1 – Interview with Rande Howell – Why trading without emotions is a myth
June 29, 2015
Episode 2 – Interview with Zentrader Jeff Pierce – From trading at a public library terminal to full-time trader
July 6, 2015
Show all


The next Meetup is scheduled for July 14 from 6-9pm. Look forward to seeing you all there!
RSVP now.


Weekly Commentary –

This week we saw major market indices come down from their recent highs.
The Dow and S&P500 indices closed the down roughly ~1% to end the holiday shortened week.

Remarkably on the S&P500 we are only ~0.50% away from where we opened up in January which goes to show what kind of year it’s been so far.

Selling pressure appears to have increased and I could see additional selling pressure in the weeks to come.

On the SPY we have an unfilled gap down at 201.92 which would be a natural place for price to gravitate to fill the unfilled gap we put in back in February. Look for the possibility of a pullback to fill the recent gap followed by renewed selling > ABC pattern.

After all is said is done, if we take a look at the monthly chart on the Dow, we’re still a long ways away from what we can consider a normal 10% market correction.

Here’s an update on our sector rotation watch.

This week we saw Utilities as the only sector showing positive strength on the week.
However looking at the individual charts, 4 out of 9 sectors – the Builders, Energy, Industrials, Utilities – are now trending downwards.

The major sectors are posted here on Finviz for your viewing pleasure –


Discussion of the Week – What horse betting and position sizing have in common

Have the following questions ever left you stumped?

  • My trading’s been going well so when is it the right time to add size to this setup?
  • I trade various setups, how do I manage how much money to allocate to each setup?
  • Why is it that every time I try to increase my position size, my trading slumps?
  • Why is it that I’m always giving back a large portion of my hard earned gains?

The answers to all these questions is very much steeped in the practice of good risk management and “position sizing”.

Position sizing is a topic that gets talked about a lot in trading circles.

There are many variations ranging from very complex mathematical models to simple online calculators to help you determine the ideal position size based on variables like risk to reward, expectancy, portfolio size, win loss rates, and so forth.

But this complex topic can summed up by a 5th grader in less than a minute:

“Increase your size when winning and decrease when losing”.

Or put another way, lose small when you’re wrong and win big when you’re right.

It sounds so simple. But how many traders actually follow this principle?

In fact I’ve seen some traders not only avoid following this principle, but actually do the opposite – they increase the size of their risk after losing a series of trades or, even worse, they do it after each losing trade.

“Taking small losses is part of the game. Taking large losses can take you out of the game” – Doug Kass

Let me share one of my favourite approaches to help you along your position sizing journey.

The Graduation Plan

The method involves using a “Graduation Plan” approach as popularized by Michael Toma in his book, The Risk of Trading.

Toma uses a great analogy and likens tracking and managing all of his trade setups similar to how one would track and manage a pool of race horses for horse betting.

The Graduation Plan is a simple way to visualize which setups (horses) are performing the best and increasing the size of your wagers on those setups.

Screenshot of the Graduation Plan.

As you can see in the screenshot I’m using the Graduation Plan to track various setups I use on the YM (the Dow e-Mini contract).

The Graduation Plan tracks the following variables –

  • The setup number (or name)
  • The current size level
  • The graduation “count” / in this case # of YM points
  • Win/loss record
  • Win percentage on each setup
  • Win % Goal on each setup

The idea is to track your trades and only increase the size of your positions once the setup has proven itself by hitting your goal line and “graduating”. Upon graduating, one can increase their share or contract size.

What I like about this approach is if you trade multiple setups (like I do) then each setup is evaluated independently.

All of us as traders understand that in order to maximize profits then we want to be allocating more capital to those setups that are working and this approach allows us to be methodical.

On the other hand some setups may be struggling and depleting your capital, and here’s a very simple way to begin to monitor then reduce your exposure to the setups that are just not effective.

The beauty of this approach is that you can modify The Graduation Plan any which way you want to fit your trading goals or instruments. Click here to download my Graduation Plan (Excel).

For instance you may want to extend your requirements for graduation for each setup, thus allowing your plan to require more net positive trades prior to graduating a setup.

Personally I’ve been using the accumulation of YM points but you could use # of wins, multiples of R, etc.

Furthermore going through this process should also help increase your confidence in your setups, thus allowing the transition to a larger trade size to be less stressful.

For instance, one risk control strategy one could employ is to retrace back to the second level after successful completion of the third graduation level thereby reducing the likelihood of playing out the familiar boom and bust cycle many traders experience after some success.

Finally how about using The Graduation Plan during the process of taking a new setup from backtesting, simulation, to live trading?

As any trader can attest to, taking a setup live is where the rubber really meets the road. Again how could using a process like this increase your level of comfort and confidence?

In conclusion, in a previous Meetup I presented the importance of keeping a detailed trade journal and while this approach does not replace the need for the trade journal, the relative simplicity of the plan also addresses one of the key position sizing lessons most beginning traders need to learn.

That is the success of your setups will trigger your contract and share sizes to increase.

Your goal as a trader then is to execute your setups perfectly and graduate all of your setups.

Happy Trading,


PS: We’ve started up a Facebook Group for the Meetup group. Come join in on the discussion and share your ideas –



What horse betting and position sizing have in common

by editor time to read: 5 min