Colby's Time-Tested Money Management Rules
To Ensure Survival over the Long Run

1. To achieve consistent success, always play by these rules. No exceptions.
2. Investing is a serious business that requires you to manage—plan, organize, and control—with consistent discipline.
3. Preserving capital is priority number one. Capital takes time to accumulate but can be lost quickly without sound management. Always place the greatest emphasis on strict risk control.
4. Beginning traders should risk only a small fraction of their capital using minimum-size orders. Gain real-time market education as inexpensively as possible.
5. Avoid overconfidence after winning trades. Always remember that the market can do improbable things it has never done before. No one knows what it might do next. Be sure to have an exit strategy in case of the unexpected.
6. The trend is your friend. Always respect the dominant trend. In a bull market, look only for opportunities to enter and exit from the long side. Avoid bear markets, or trade only from the short side.
7. Analyze trends in multiple time frames. Consider both the time frame you are trading and higher time frames.
8. Calculate probable reward/risk ratios before entering a position. Enter only when your analysis indicates a high probability of a winning trade and significantly greater potential reward than risk.
9. Calculate bet size. Commit no more than 5% of total capital to any one position. This way, you can recover more easily from a few bad trades.
10. Short-term traders should limit losses to 1% or less per position.
11. Short-term traders should limit total portfolio losses to 5%. Call a time-out from trading when total equity drops by 5%. This allows you to clear your head, settle your nerves, break bad momentum, limit negative spirals, and calmly reassess your strategy away from the heat of battle. A time-out prevents revenge trading—the destructive urge to quickly recover losses—which often leads to even greater losses.
12. Longer-term investors should limit losses to 5%–9% per position.
13. Longer-term investors should limit total portfolio losses to 15%. Call a time-out from investing when total equity drops by 15%. Losses of 15% or more are harder to recover from and often lead to deeper declines.
14. Enter actual price stop-loss orders. If the price drops by a predetermined amount—set in advance according to your analysis—you exit the position automatically. This avoids procrastination. Mental stops are too easily rationalized away.
15. Use time stops. Time stops prevent tying up capital in positions that are not working.
    • Short-term traders: exit losing positions at the close of the day.
    • Swing traders: exit losers at the end of the week.
    • Longer-term investors: consider time stops at the end of the month or quarter.
16. For systematic trading, find a system with an edge. Rank trading systems by Expectancy: (Win Rate × Average Win) − (Loss Rate × Average Loss).
17. Rank trading systems by the Calmar Ratio: Compound Average Annual Rate of Return ÷ Maximum Drawdown. The Calmar Ratio should be based on actual trading records and blind simulations using unseen data.
18. Trading and investing must be adaptive. Markets are always changing and evolving. Trends can shift suddenly, and any trading system can stop working at any time. Transitions between bull and bear markets require changes in trading style.

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Robert W. Colby, CMT (Chartered Market Technician), is Chief Investment Officer and Portfolio Manager at Robert W. Colby Asset Management, Inc., a New York Registered Investment Advisory firm established in 2009. He is recognized worldwide for his expertise, objectivity, independence, and integrity. 

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