2% Rule(s)

SoCalOptionsWriter · May 12, 2023

Ok, I'm weeding out my losses here, and I'm wondering if I use a close at 2% loss rule, whether it should be based on the unmargined cost of the position/trade (the trading cost, I guess it is called), the margin cost of the position/trade, the percentage of the individual account or the percentage of the total of all accounts under management (AUM).

I suspect it is the former and 6% applies to choice 3 or percentage of individual account.

Any thoughts for margin cost of the position/trade or AUM?

As always, thanks in advance.

Businessman · May 12, 2023

When you put the trade on how much $$$$ were you prepared to lose on the trade if it went against you. Stick to that number.

newwurldmn · May 12, 2023

SoCalOptionsWriter said:
Ok, I'm weeding out my losses here, and I'm wondering if I use a close at 2% loss rule, whether it should be based on the unmargined cost of the position/trade (the trading cost, I guess it is called), the margin cost of the position/trade, the percentage of the individual account or the percentage of the total of all accounts under management (AUM).

I suspect it is the former and 6% applies to choice 3 or percentage of individual account.

Any thoughts for margin cost of the position/trade or AUM?

As always, thanks in advance.

For a strategy where i use a similar stop loss. I use 1% of my AUM.

schizo · May 12, 2023

SoCalOptionsWriter said:
Ok, I'm weeding out my losses here, and I'm wondering if I use a close at 2% loss rule, whether it should be based on the unmargined cost of the position/trade (the trading cost, I guess it is called), the margin cost of the position/trade, the percentage of the individual account or the percentage of the total of all accounts under management (AUM).

I suspect it is the former and 6% applies to choice 3 or percentage of individual account.

Any thoughts for margin cost of the position/trade or AUM?

As always, thanks in advance.

Using some arbitrary $ or % for stops is pretty stupid. It should be placed strategically around major reversal zones, such as support/resistance or trendlines, to name just a few. For instance, consider this chart of AAPL. It's still trading in an uptrend. You want to stay with the trend until it breaks below the trendline.

Flynrider · May 12, 2023

“2% loss” guideline refers to amount of risk per trade. "Amount of risk” is a function of structure (e.g. absolutely defined risk, stop loss assumptions defined risk, market movement priced (IV) defined risks, your guess at support/resistance price, margin required). “per trade” risk is a function of how you define a trade (e.g a 5-40 year trading career? A 1-60 day period? A “Trading account” balance? A single vertical spread opened all at same time? A ticker you have completely tranched into already?).

tomkat22 · May 12, 2023

The market sooooo loves to take your money,you cant let it do that.I dont use a hard stop,I can fudge on it a little,but not much. But there comes a point where you have to admit you were wrong on that trade and throw in the towel.

newwurldmn · May 12, 2023

schizo said:
Using some arbitrary $ or % for stops is pretty stupid. It should be placed strategically around major reversal zones, such as support/resistance or trendlines, to name just a few. For instance, consider this chart of AAPL. It's still trading in an uptrend. You want to stay with the trend until it breaks below the trendline.

View attachment 314727

why is it stupid? It provides a scaling factor.

The width to your stop * shares = some percent of your account

schizo · May 12, 2023

newwurldmn said:
why is it stupid? It provides a scaling factor.

It's stupid in that the 2% AUM is completely random, namely it can be anywhere on the chart. What if it's just above the trendline or support/resistance? In that case, it will surely get hit and you'll be stopped out. It would be much better to place it under the trendline even if it's more than your average 2% rule.

deaddog · May 12, 2023

schizo said:
It's stupid in that the 2% AUM is completely random, namely it can be anywhere on the chart. What if it's just above the trendline or support/resistance? In that case, it will surely get hit and you'll be stopped out. It would be much better to place it under the trendline even if it's more than your average 2% rule.

When I use the 2% rule I use it as follows:
2% of my acout value is the amount I'm willing to risk on any one trade.
I take the difference between my entry and my stop and use that amount to divide into amount I'm willing to lose.
If 2% of my account value is $2000 and the difference between my entry and my stop is $10 my position size is 200 shares.
Entry and stop are part of the set up. They vary depending on how the stock is acting.

newwurldmn · May 12, 2023

schizo said:
It's stupid in that the 2% AUM is completely random, namely it can be anywhere on the chart. What if it's just above the trendline or support/resistance? In that case, it will surely get hit and you'll be stopped out. It would be much better to place it under the trendline even if it's more than your average 2% rule.

How do you figure out how many shares you will trade?

Two percent represents the number of shares* your stop width. Set your stop width to be under the trend line and figure out how many shares you need to make the risk 2percent.