Grading is changing a pattern's size. I've been grading my pattern for the Mitchell Mitchell Shift Dress from a size 3 to a size 4 and 5. For my grading, I'm using a Burda measurement chart, because I like their fit.
My measurement charts shows that on average, 3 to 5 year old kids are shooting up and expected to grow 6 cm in height each year. They don't get a lot wider - ie. their chest measurement increases just 1 cm for each year/size.
So I've traced the original size 3 pattern onto paper and am making a "nest" of 3 sizes, by adding the increments from the measurement chart. I scanned my handdrawn grading and traced around patterns in Illustrator to neaten them up. A quick trip back to Officeworks and I have my patterns printed full size.
Last step was to make up my patterns in the 3 sizes to check pattern pieces sew together well.