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The Risk of Trading: Mastering the Most Important Element in Financial Speculation by Michael Toma

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THE GRADUATION PLAN

The emotional challenges with raising your share or contract exposures when your plan is successful are often underestimated. Many traders find an emotional comfort zone that is difficult to penetrate even though their results are telling them to continue to raise quantity levels. This actually will increase your risk of failure to reach your plan goals. In order to capture a method of managing trade risk while eliminating the intricate process of the Kelly criterion, I've developed a rather simple approach to meeting the same objectives. It contains the increase as you win–decrease as you lose format but factors in the emotional elements and market randomness associated with the inevitable drawdowns associated with any trading plan. The methodical elements and smoothing of quantity increases the opportunity to allow for share and contract sizes to adjust along with your comfort level. The unique component of the graduation plan is that it works independently for each valid setup in your trading plan.

Your responsibilities include tracking your trade results for each setup that was traded. While the Kelly strategy assumes we have a positive edge in our trading, we know that reality (and market randomness) says that any trade or a series of trades over a period of time can result in a negative outcome. The graduation plan also considers the level of confidence you've accumulated during the back-testing process but does not have historical trade results that factor ...

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