Ask Colin

How do you treat dividends when calculating your stop-loss levels?

There are already several earlier questions and answers that deal with this issue. It may be of interest for you to review these with respect to when to adjust charts for special dividends.

There are two approaches to the money management calculations. The perfectionists among us like to do everything very precisely and exactly. They might feel, wrongly, that the precision gives greater comfort. So they will carefully adjust for brokerage, slippage, dividends and so on.

I take a different view. What we are trying to do is to limit risk of overtrading. The whole idea is not an exact one. So, I don't worry about brokerage, slippage or normal dividends and so on. I keep the calculation of position size simple and the stop-loss is not recalculated unless a dividend event makes it absolutely necessary (rare).

One way I do this is to use a smaller percentage of total trading funds at risk than others do. For instance, Elder uses 2% and allows for brokerage and slippage. I use 1% and ignore those things. The end result is about the same in practical experience.

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