Ask Colin

What is the "Standard Position Sizing or Money Management rules" you refer to in the September 2001 article in Shares on page 78?

The standard way to determine the size of your position is to relate the risk back to the size of your trading funds. The idea is that you only ever risk a small percentage of your funds on any one trade. Since the prime aim is to stay in the game, preservation of capital is your first priority. This means you must be able to make many losing trades and still be able to stay in the game.

So, you determine with technical analysis where you are wrong about a trade. This depends on the reason you are making the trade and will be different for each person depending on their trading plan. The point where you are wrong is where you must get out of the trade and is called the stop-loss level.

Once you know where you are wrong, the risk is the difference between your buying price and the stop-loss level.

You then take the percentage of your capital you are prepared to risk (usually 0.5% to 2% for good traders with adequate capital). You divide this by the risk and you have how many shares you can buy.

So, if you can risk $1000 and the risk is $1 per share, you can buy 1000 shares.

I also dealt with money management in my article in Shares magazine in May 2000 headed Learn How to Avoid the Self-Destructive Trade, which may be accessed from the Members' section of my web site.

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