2% Rule

I trust you two more helpful in person


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OP

The formula for net liquidation value;

Total Cash Value + Stock Value + Securities Options Value + Bond Value + Fund Value



But as you didn't speak of options/ bonds or funds

The formula for your example distills to;

Total Cash Value + Stock Value (what I laid out)

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Aside; (and the problem with throwing out partial answers)

One could potentially misinterpret either above formula to mean; so, as one’s current position increases in value – so too should the risk

Never... allow that to happen


eta; Managing risk is a very important skill... and well worth the time and effort to hone it


RN
 
do not forget when you are arguing about how much you want to trade, someone is smiling.

then who?

your brokage.

why?

when you divide limited resource into small pieces, you create lots of commissions.
that is their sale point.

in a war, the winning side always wants to keep its power, and diminishes opponents' power.

one stick easily breaks, if you ties two sticks, it become harder to break, then how about tie together 10 sticks, it becomes almost possible for you to break by your bare hands. this tells you that: you should not divide!

I always all in when I was a small retail trader since my account was too tiny. I want to get as much power as I can, so I can survive!
 
give you a small example.

if you have $1m, you can almost manipulate a stock under $5 if its floating shares are just 1m.

against you 10% , even 90%, you still can breathe (still $100k account). but if you just have 10k, against you 90%, you are dead, each trade's commission fee will occupy 1%~2% of your account, if factor in round trip, maybe 3%~5%. your account is not operational any more.

NEVER DO SUICIDE by dividing yourself when you are just a baby.
 
This 2% figure has become a de facto standard for non-professional traders. If you were going to open a business on your street, say a coffee shop, would you only risk 2% of your available capital in its start up or would you put in as much as was needed? Trading is like any other commercial endeavor. If you're holding back on the investment you're going to get poor to disastrous results.

If you don’t have an overall winning method for trading then no amount of risk management will make you money. If you do have a winning method then limiting your risk to 2% is a waste of your time and money. You need to bet large on the basis you’re method will pull positive expectancy. Certainly consider limiting your losses to a smaller percentage per trade be that 1% or 5% or 10%, but don’t structure your position size on the basis of losing all your risked capital on every trade. Bet 2% - win 2%. Not bad. Bet 15%, win 5% much better. Providing your absolute allowable loss in each case is the same percentage, you’ll put quite a powerful curve in your P&L. Confidence is king once you’ve proven competence of the basics.
 
kut2k2 said:
Does anybody else find it funny that the OP is concerned about the 2% rule after he's already committed 80% of his trading account to risk instruments? Talk about locking the stable door after the horses have escaped! :D
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Not so much funny as expected. The majority of those who start out trading commit funds to the enterprise long before they confirm they have a viable method and run out of funds before they ever find one. Any other kind of commerical enterprise, you'd never get off the ground in the first place without a viable business model; which is a blessing. There are far fewer fools in commerce of all kinds put together than there are fools of traders.
 
PieterSteidelmayer said:
Not so much funny as expected. The majority of those who start out trading commit funds to the enterprise long before they confirm they have a viable method and run out of funds before they ever find one. Any other kind of commerical enterprise, you'd never get off the ground in the first place without a viable business model; which is a blessing. There are far fewer fools in commerce of all kinds put together than there are fools of traders.
More...

Capital commitment of a trading book at the trade level is not comparable to the capital commitment of an operating business at the trade/working capital level.
 
newwurldmn said:
Capital commitment of a trading book at the trade level is not comparable to the capital commitment of an operating business at the trade/working capital level.
More...
Not sure how you imagine this relates in any way to my comments which you quote, but let me make it even simpler for you.
Get the winning trading method first, then start using real cash. Risk management on a losing trading system does not turn it into a winning one.
 
PieterSteidelmayer said:
Not sure how you imagine this relates in any way to my comments which you quote, but let me make it even simpler for you.
Get the winning trading method first, then start using real cash. Risk management on a losing trading system does not turn it into a winning one.
More...

Elitetrader had an internet fart on me and I quoted the wrong message.
I was referring to your coffee analogy in another post.

I agree with you on this one; but the 2% rule isn't just a retail thing. I spoke to a large event driven fund (2 Bn) that had the same rule.
 
PieterSteidelmayer said:
This 2% figure has become a de facto standard for non-professional traders. If you were going to open a business on your street, say a coffee shop, would you only risk 2% of your available capital in its start up or would you put in as much as was needed? Trading is like any other commercial endeavor. If you're holding back on the investment you're going to get poor to disastrous results.

If you don’t have an overall winning method for trading then no amount of risk management will make you money. If you do have a winning method then limiting your risk to 2% is a waste of your time and money. You need to bet large on the basis you’re method will pull positive expectancy. Certainly consider limiting your losses to a smaller percentage per trade be that 1% or 5% or 10%, but don’t structure your position size on the basis of losing all your risked capital on every trade.
More...
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Peter;
Lot of good points there, i thought of your first/2nd sentence, also, agree with much of it.
However , for new trader/any trader, for sure there is MUCH more risk in a single sock[op question said $8,000,a single stock] than paid for real estate/ coffee shop.Lot more stocks than paid for realty have gone to goose egg[zero $]....

And it doesnt sounds like he meant a stock like DIA,SPY ,or QQQ; so 10% is probably way too much for a single stock, [gap downs.......old bull market, or sell off because secretary was mean to a mutual fund manager,LOL]10 [@10%,]shots + he is outof the game.....

Trading stocks is risky enough, much better to err on the side of caution;
especially in an old bull market, especially in a bull market that is rather late in the year, especially with a monthly LOW[SPY,] taken out this year....:cool:
 
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