Ask Colin

With a $370k portfolio, I risk 2% in calculating position size with the stop 8% below my entry. Why is the dollar value of the position always the same?

It is the same because you are using the same percentage of your entry price for your stop. That is not how I do it.

I set my stop-loss level based on technical analysis. It will vary enormously in the percentage that is of the entry price. That is the whole point to the position size calculation:

When the stop is close, like your 8% of entry price, the position can be quite large. However, if the stop is wider, say at 40% of entry, price, your position size is not allowed to be so large.

The really interesting thing is that the closer the stop, the greater the risk that the stop will be hit and the trade be a loser. The whole key to the position size logic is that you always risk the same percentage of capital. It is your position size that changes. So with a wide stop, there is less risk of the stop being hit, but you have only a small position, so if it is hit, the loss is the same as a larger position with a closer stop.

The other thing that I would comment on is your risk percentage. You have a large portfolio. I would not risk 2% on such a large portfolio. The whole aim of investing and trading is to get larger and the larger you get the less you need to risk and still do meaningful trades. I would only be risking a maximum of 1% of capital on your portfolio size, but preferably less - aim for 0.5%.

I learned this from Jack Schwager's Market Wizard Books. The bigger the trader and the better the trader, the smaller the percentage they risked on any one trade. Give it some thought.

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