Ask Colin

RISK/MONEY MANAGEMENT

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  1. Why do you use total capital for your position sizing calculation?
  2. The prices of some of my stock have moved well above my stop. What should I do?
  3. Are there times when we have to risk more than 2%?
  4. My stop at 2% of capital is $2000, which is 66% of the investment. Isn't this too high?
  5. How effective is the 52-week new highs scan towards the end of a bull market?
  6. I have 6 stocks in my portfolio, but it is quite unbalanced. Should I rebalance it?
  7. How much capital do you allocate to any one stock if your market exposure strategy setting is to have only 50% of your capital invested in the market?
  8. How do you adjust existing positions if you add substantial amounts of capital to your portfolio?
  9. As your portfolio grows in size, when will you reduce the amount risked on any one stock below 1%?
  10. As your portfolio becomes larger, say several/many millions of dollars, how will that change your ability to easily open and close investments?
  11. Just what is your regimen for controlling the purchase of stock, including timing, for your portfolio?
  12. I have heard that a portfolio should have a stop-loss at 2%. What do you recommend?
  13. On risk management isn't 2% too small? I was thinking 10% so I don't get taken out too quickly?
  14. I am thinking of trading smaller stocks starting with a $50,000 portfolio. Which is wiser: twenty $2500 parcels or ten $5000 parcels?
  15. Dr Elder risks a maximum of 6% on all of his positions at one time. What is your total risk in the various market phases?
  16. I have capital of only $50k. Is your maximum investment of $6k in one stock appropriate, or should I go larger?
  17. I have capital of $50k. I risk 0.05% on each trade. Is this smart?
  18. With capital of $50k, you would have an initial position of only $1k building to $3k. Is this worthwhile with $20 brokerage each way?
  19. Should I allow for slippage in my money management?
  20. 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?
  21. If you have a broad portfolio of stocks isn't the idea that some go down, but are balanced by others that go up, so overall you get the general growth in the economy and therefore a mediocre result?
  22. Is there a practical limit to the number of stocks one should buy?
  23. Could you explain the 6% rule (as opposed to the 2% rule) and suggest additional readings?
  24. I can't see how I can win at trading unless I make more than 20% on each win and my wins are more than 50% of my trades. Please explain?
  25. Does your method rely on taking every trade so that the few large winners overcome the many small losers?
  26. Why don't you limit risk to 6%, like Elder does?
  27. My broker has a minimum of $7,000-8,000 trade size plus 1% brokerage plus $40 location fee on short sales. I have only $20,000, so it upsets my money management. Can you suggest an alternative?
  28. What proportion of your capital do you invest in any one stock?
  29. How do you manage the size of your position once it moves into profit?
  30. What is an appropriate exposure to the share market now (November 2002)?
  31. Could you give me, in order of priority, a reading list on money management?
  32. To deal with high market risk, I have halved my amount risked per trade. Now I often cannot buy sensible amounts. How do you deal with that?
  33. Is it not possible to increase returns by margin lending and further spicing them by using derivatives?
  34. If one of the stocks I hold goes up a great deal, should I sell some to rebalance the portfolio?
  35. How much of my trading capital should I commit to one stock?
  36. What are good sources from which to learn money management?
  37. Because you limit your position size to 6% of your equity does that mean you are prevented from buying high priced stocks like the banks or CSL or Cochlear. If you did buy a high priced stock the lack of leverage would take away from the attractiveness of the deal if you were to limit it to 6% of your equity.
  38. How do you treat dividends when calculating your stop-loss levels?
  39. I recently received your videotapes on how to design a trading plan and I thoroughly enjoyed watching your presentation. I'm having a little bit of a problem trying to work out my position size. Could you please advice me on a appropriate strategy to manage my risk as I have only a total of $15,000.00 trading capital. What would be the maximum diversified positions I could hold? If I use the 6% maximum rule I can only purchase a small parcel of shares and with the 2% minimum position building, and the cost of slippage it would not be worth trading.
  40. Should I have special stop rules for large sudden market falls? 
  41. How would you make a trading plan for a very small amount of money? I have set aside $5,000 to trade (and learn) with. Your trading plan, formulas and equations are for much larger amounts. I am watching stocks up to about $6 and have had some successful paper trades but have not formed a clear trading plan as yet.
  42. What is the "Standard Position Sizing or Money Management rules" you refer to in the September 2001 article in Shares on page 78?
  43. Please explain standard position sizing or money management.
  44. If after applying the diversification rule and you are above the 6%, do you cut it back (to say 2%) or do you forgo the trade?
  45. One of the E114 Technical Analysis lecturers mentioned a book on money management. Can you help?
  46. Can you recommend a book dealing specifically with profit protection, money management and pyramiding?
  47. How do you feel about setting very tight initial stops?
  48. What is pyramiding and how is the best way to do it?
  49. I find it hard to use Dr Elder's 2% and 6% rules for investing. The stops are too far away. What do you suggest?
  50. Last August/September you presented a seminar at the ATAA. You lead us through your trading method. You also outlined a calculation that was centred around money management. It took in to consideration trading capital and 1% stop loss. I cannot find the calculation and was hoping you can send it to me.
  51. When you decide to only trade say 30% of your capital, do you base your position size calculations on your total capital, or the 30% that is available for trading?
  52. What is your trading method's 'edge'?
  53. What is the win/loss ratio of your trading method ?
  54. You refer to an initial position size of 6%.... with minimum entry of 2%. You recommend selling half if the trade is successful and reaches 12% of capital to maintain balance and diversification. In some examples you refer to further purchases as it takes out the top in each swing... Do you mean that you keep buying until your holding equals 6% of capital? Would you ever consider exceeding the initial 6%?