2% Rule

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elitetradesman

When you apply the 2% rule, do you take 2% of trading capital or current cash balance to caculate the amount to risk?

For example, if you have $8000 worth of stock and $2000 in cash, do you risk 2% of $2000 or 2% of $10000?

Thanks.
 
You have a few nuances going on that must be addressed first

My initial question

Your 8K in stock – should it go belly up, where’s the money coming from to cover that loss


Next question;

Did you start out w/ 10K cash, and purchased 8K of stock.... or something less - and the stock holding grew to 8K




RN
 
Quote from Redneck:

You have a few nuances going on that must be addressed first

My initial question

Your 8K in stock – should it go belly up, where’s the money coming from to cover that loss
More...

The example assumes this is the only trading account you have. There's no other source of trading capital.


Next question;

Did you start out w/ 10K cash, and purchased 8K of stock.... or something less - and the stock holding grew to 8K
More...

Let's say you started with $10000.
 
Then 2% of the 10K**

** assumes the 10K is net cash - iow no margin (leverage/ multiple of net buying power) used to establish the 8K position

If margin (leverage/ multiple of net buying power) was used - back it out to calculate net capital, the risk would then be 2% of the net cash in the account prior to entering

RN
 
Quote from Redneck:

Then 2% of the 10K**

** assumes the 10K is net cash - iow no margin (leverage/ multiple of net buying power) used to establish the 8K position

If margin (leverage/ multiple of net buying power) was used - back it out to calculate net capital, the risk would then be 2% of the net cash in the account prior to entering

RN
More...

Thanks. Another thing, if you started with $8K in a cash account, and bought $6K worth of a stock which grew to $8K, how much of $10K should you risk in the next trade with the 2% rule in effect?

Conversely, what if the stock dropped to $5K? How much of $7K should you risk?
 
Quote from elitetradesman:

When you apply the 2% rule, do you take 2% of trading capital or current cash balance to caculate the amount to risk?

For example, if you have $8000 worth of stock and $2000 in cash, do you risk 2% of $2000 or 2% of $10000?

Thanks.
More...

The amount to risk depends on your stop loss.

For instance if you open a trading account with $10,000, you could buy 1,000 stocks at $10 each (total = $10,000) and put a stop at $9.80, thus risking only 2% of your starting capital (we will forget about commissions, spread and slippage in this example).
 
Quote from elitetradesman:

Thanks. Another thing, if you started with $8K in a cash account, and bought $6K worth of a stock which grew to $8K, how much of $10K should you risk in the next trade with the 2% rule in effect?

Conversely, what if the stock dropped to $5K? How much of $7K should you risk?
More...


2% risk is the rule...

So 2% of net account balance prior to entering each trade
(assumes 1 trade at a time – if entering multiple – then keep overall risk to 2% of net account balance)

However, in the case where the previous trade was a loser – or possibly the previous few trades – I would assess if the loser(s) is/ are the norm… or I’ve become out of sync w/ the mkt

If deemed normal course of business – keep on truckin

If deemed out of sync – then I would reduce risk (via reducing size) and keep it reduced till back in sync (hanging it up for the day and going fishing is also an option)

=================

This also brings up another issue;

Looking at / thinking about.., then potentially trading one’s account during the trading day – I am dead set against that

Jot down your numbers on a pad each morning… or even better the night before (so time can pass)…, know the number of losses you’re willing to experience that day…, then completely forget about your account (use the pad & pencil to record updates)

Always trade the mkt… never your account

HTH

RN
 
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