2% rule on small accounts?

[Cutten]

Quote from melee:

well what do ya think?

in various books ive read about money management they usually tell ya to get out of a trade when your down, at a maximum of, 2%, so that you can take successive losses. well what about those of us who only have 10,000 bucks or less in there accounts? thats only 200 dollars! now, i look at that 200 dollar limit and say that means i can only do day trading or i have to have darn good timing on longer term trades.

right now im am solely focused on gold futures and that represents only 20 ticks of price movement. i dont know how $200 is in other futures, stocks, or options.

another way im thinking about going is just limit my loss on a trade to definite amount. lets pretend that i got 10000 dollars and a gold contract costs 2500. that leaves me with 7500 in my account. if i say 200 is my definite get out amount i can trade 37.5 time with 1 contract (not factoring in commission, profits, etc) until my account is empty. adjusting that amount effects more that how many times i can trade, it also effects the amount of market noise i can withstand on a trade.

whats a low capital speculator to do?

Trade stocks. Trade small. Only increase size if you are making sufficient retained trading profit to justify it.

With $10k that is not enough to trade full-size futures without taking high risks.

The 2% rule is if anything too risky for beginners. Try risking 0.1% instead, since the odds are that you are going to be a net loser for the first year or two anyway. 2% is a decent risk for proven profitable traders with a solid, tested method, and an adequate capital base. Beginners with no track record, most likely no edge, and inadequate capital should be taking way less risk than veterans.

 

[dave74]

Do most good traders use trailing stops? If so, do they use bid/ask trailing stop or last price trailing stop?

Thanks.

 

[Cutten]

Quote from TSGannGalt:

2% rule is just an over-rated rule that the "outdated"-Market Wizard book created. I am very very very sure that:

1. Most of the MWs aren't trading anymore.

2. The surviving MWs trade differently since the book.

----------------------------------------------------------

For small accounts, think in terms of lot size.

By the time you have a bigger account and competency in risk, you won't be using any of those Tharp / Market Wizard stuff.

Risk management is the one trading factor that never changes. If you are regularly risking more than a few % on any given trade, you are eventually going to take a bath, unless you have an extraordinarily high win rate. Imagine risking 5% per trade - just 4 losers in a row and you are down almost 20%. If you trade long enough you will eventually see losing streaks of 10 trades or more, just by bad luck. Heaven help you if your method actually degrades so it no longer works in current conditions. You will be down 50%+ before you know what has happened.

 

[sporky]

Quote from Cutten:

If you trade long enough you will eventually see losing streaks of 10 trades or more, just by bad luck.

bad luck?!

if luck has anything to do with your thinking forget trading.

as for the OP, trade eCBOT's smaller gold contract. with proper RM you'll be fine if your edge is good.

 

[ronblack]

Quote from Cutten:

Risk management is the one trading factor that never changes. If you are regularly risking more than a few % on any given trade, you are eventually going to take a bath, unless you have an extraordinarily high win rate. Imagine risking 5% per trade - just 4 losers in a row and you are down almost 20%. If you trade long enough you will eventually see losing streaks of 10 trades or more, just by bad luck. Heaven help you if your method actually degrades so it no longer works in current conditions. You will be down 50%+ before you know what has happened.

Good post.

Someone told me once that if you trade long enough there is always a losing streak with your name on it enough to wipe you out so risking less percentage of your account per trade makes it more improbable for the streak to show up during your lifetime and before you retire.

Ron

 

[vectors101]

If you lose 2% in on trade, you can make it back easily with one trade.

If you lose 20% it's tough to make a back in one trade

 

[vectors101]

If you lose three times staight, there is something wrong with your system or something wrong with your emotion stamina

 

[sporky]

Quote from vectors101:

If you lose three times staight, there is something wrong with your system or something wrong with your emotion stamina

I don't think so

 

[aidaweb01]

Assuming your system does not deliver 100% winning trades (a safe assumption I think) then at some point your system will deliver a run of losers greater than other runs.

As long as you continually review your system and have no reason to feel it has lost its edge, then the best way to deal with a run of losers is to take some time off trading. Having a set of rules that make it easy when to this is the way I trade. If my system delivers 3 losers I stop trading for a week. It doesn't stop the losing runs, but it means I can only lose a certain amount in a week and will therefore still be in the game next week.

 

[sporky]

Quote from aidaweb01:

It doesn't stop the losing runs, but it means I can only lose a certain amount in a week and will therefore still be in the game next week.

why prolong (time-wise) your losing streak?! you're just picking up where you left off and gained nothing, but did lose time.

the sooner you get it over with the sooner you get back to making money.