Ask Colin

If I am only trading 40% of my capital, should my position size be calculated on my total capital, or only on 40% of it?

The way I look at it, position size calculations are always done on our total capital. This is based on the idea that our maximum risk on any one trade is a percentage of our total capital. If we only used part of our capital, we would be saying that we wanted to take less risk on those trades. However, by restricting our exposure to the market to, say 40% of total capital, we are already reducing our risk, when we think the overall market risk is high. So, if we only used 40% of capital for our position size calculation, we would, in effect, be reducing our risk twice.