2% stop loss rule?
- Thread starter turkeyneck
- Start date
Good, this was the most tedious discussion I've had since leaving local government.
The 2% rule is not used to determine stop-loss placement. Stop-loss placement is decided using TA. The rule is a position-sizing technique. The aim is to ensure that no individual trade ever incurs a loss greater than 2%. The rule does not demand that 2% is always the amount risked on every trade.
That's what the rule is. The more interesting arguments would then include, that it should be no more than 1%, or it should be at least 5%, or it should be applied to day-trades, or whatever people can think of.
Nevertheless, you both had some good and valid points to make, and both made them well and clearly (in spite of the fact that you were slightly talking at cross-purposes to one another, at one point, earlier on, and we could see that the conversation was frustrating to each of you). The thread was actually valuable partly because of your contributions to it, guys.
I've read Elder (while back) and there is a method - set S/R points by previous T/B with a bit of extra, then determine what the loss will be at those stops for 1 share (say $1 for this setup). Set your 2% limit (say $200) and buy 100 shares. Stop risk therefore sets the allowable position size. If you need bigger stops to accomodate S/R, then your position size is lowered. Stops based S/R is the trading decision, 2% is just an easy way to manage risk based on the analysis.
It's not 'wrong' or 'right' it's just a method.
It depends entirely on what you are looking to do, what your criteria is, your goal, for being in the markets.
Most people don't have a f***ing clue, and are too lazy to spend a Summer staring at a ceiling fan to figure that one out. So, like most people in most of life, saddled by momentum and crippled by fear, they come up with some bullshit percentage dictated by their degree of fear.
Use what is most comfortable for you for the specific trade after assuming that it will be a LOSS, not a gain.
2% means if you have 10 losers in a row, quite rare but can happen, you only lose 20%.
1% is low risk
2% is medium risk.
4% is high risk.
Really up to the trader. But 2% is a middle ground where you can make large profits, 100+% in a good year. Without having huge drawdowns like 50% on a regular basis.
I risk not more than 1% per trade, but that doesn't mean I always risk that much every time I trade. I heard that professionals never risk more than 4% of their capital.