Ask Colin

On risk management isn't 2% too small? I was thinking 10% so I don't get taken out too quickly?

I actually think 2% is much too high, though it depends how you measure it. If you include brokerage and slippage, it may be alright. Also, you told me separately that your capital was $50K. You may have to risk up to 2% with such small capital. However, try to keep it lower if you can.

My capital is larger, which helps a bit, but my absolute maximum risk is 1% on any one stock. In reality, I rarely accept this much risk and 0.3% to 0.5% is more common. Only very rarely do I lose as much as 1% on a stocks, even when the trade goes against me badly.

10% is suicidal. At 1%, I get to be wrong lots of times before I run out of capital. At 10%, you only get about ten chances. les than that really - once you lose even 20% of your capital it becomes very difficult to recover. The biggest drawdown I ever had was 14% in the 1987 crash. If I had been risking 10% on each of the stocks I held then, I would have been wiped out!

As for being taken out quickly, as you say, you have completely the wrong idea. When I am wrong, I want to be taken out quickly by my stop-loss. That is what a stop-loss is for. Being taken out late is a good way to go broke really quickly.

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