Ask Colin

Last August/September you presented a seminar at the ATAA. You lead us through your trading method. You also outlined a calculation that was centred around money management. It took in to consideration trading capital and 1% stop loss. I cannot find the calculation and was hoping you can send it to me.

I have no recollection of teaching my trading method at an ATAA seminar. I teach my method in a weekend seminar, but no ATAA seminar has afforded me anywhere near the time necessary to teach my method. This is not a criticism of the ATAA, they are not there for such a purpose. However, I am at a loss to identify the occasion you refer to. You have not even told me which state I was supposed to be in at the time.

Also, I would like to stress that I DO NOT and never have taught a percentage stop loss. I think that such an approach is wrong and actually increases risk rather than managing it. If you set your stop above a support level, it is highly likely you will be stopped out at a loss. It is much safer to put your stop loss below a support level.

I think the calculation you refer to is the common and simple one to do with restricting the risk on any one trade to a percentage of your trading capital. I use 1%, other use 2% or even higher. These percentages are not directly comparable unless you know how brokerage and slippage are dealt with. I do not allow for them explicitly, which is one reason my percentage is low.

The calculation is simple:

1. Add up the total market value of all your trading positions. Add to it the total cash that you have earmarked for trading, but not have in the market right now. This is your total trading capital.

2. Calculate 1% of that total. This is how much you risk AS A MAXIMUM on any one trade.

3. Determine the instrument you want to trade.

4. Determine the entry price available in the market or that you wish to set as a bid.

5. Determine your stop loss level USING TECHNICAL ANALYSIS.

6. Subtract the stop loss level from the entry price. This is your risk.

7. Divide 1% of your capital by the risk. This is how many units of the instrument you intend to trade that you may not exceed.

8. If it is less than the minimum you can buy or is too small, such that brokerage and slippage are prohibitive, pass it up. Find a later entry with a lower risk or find another instrument to trade.