Ask Colin

Why don't you limit risk to 6%, like Elder does?

The differences between the two approaches are due to the orientation of Elder to short term trading - a few days to maybe two weeks, whereas my orientation is to active investing.

In an extreme case. Elder could have 100% of his equity invested in a single trade, yet only risk 2% of it. I once queried this with him, and he confirmed this possibility, albeit an unlikely one. However, I would only ever invest 6% of capital in total in one position, no matter how small the risk percentage.

In reality, Elder would have several concurrent positions. He limits risk to 6% in total. This is smart for a trader, who is doing many trades in a month and could easily eat up lots of capital very quickly without this discipline.

Active investing is rather different. I will want to be fully exposed to the market early in a bull market and stay that way until the market risk increases. I could not do this with a 6% total of stop-losses.

Market risk is far more important in active investing than in short term trading. So I have a strategy for managing it. On the other hand, Elder is not really concerned with market risk. He will go long or short as the market indicates.

So, the two approaches are quite different and the risk rules therefore need to be different.