There are 3 ways.
The shortest chain method is to loop the chain around the big front/big rear, and add 1". This has zero fudge room, and represents the absolute minimum safe length you an use.
If the RD has enough capacity you can use a longer chain, measured by the small/small combination and shortened until the RD cage can take up all the slack.
If there's enough capacity, Shimano suggests a length between these, based on the angle of the cage in a certain combination.
I prefer to use a longer chain, so I have the capacity to cut out a link in case I ever have to. But I always start by confirming that it's long enough via the big/big method.
One other note -- if you have a road bike with a 12-23 cassette originally, you'll almost definitely need a longer chain, but you may also not have enough take up capacity if it has a short cage RD. Here you have a choice. You can buy a new long cage RD, or if it's only slightly under capacity, can use the shortest chain possible, and avoid the small/smaller combinations (rarely used anyway) where the RD can't take up the slack.
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FB
Chain-L site
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Last edited by FBinNY; 10-23-12 at 12:24 PM.