The 2% rule

Quote from Fredrik_Trader:

Since the market ” doesn't give a rat's ass about my account”, I sure will.

I don’t let the size of my account determine the place of my stop, but I let the size of the stop compared with the size of my account determine the size of the position I will put on.
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This is the right angle. Optimal stop size first, how many contracts/shares that means to stay at x% risk second.

I'd agree with other posters recommending a smaller percentage of risk per position while you're starting out. You're not going to retire on your first few trades. Think in terms of learning to trade your plan...

Do a search for an ET poster called Acrary. He reportedly uses/d 0.5% risk per trade. While there are other factors to take into account when looking at his figures, such as trade frequency, it's interesting to note somone so proficient using such a seemingly small risk per trade.

AM
 
Quote from cashmoney69:

I was reading through "Come into my trading room" last night and Elder talks about the 2% rule.

This tells traders how large a position they can take on a trade. Example:

your account is 50,000

you buy XYZ at 20, your profit target is 26 and you set stops at 18.

How many shares should you buy?


- nathan
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Nathan,
From what I've read in your other posts I gather you have about 5K to trade with. What's 2% of 5K? $100.00, right. You know what you're going to trade with 100 bucks? Shit, that's what.
Now I'll probably get flamed to death for this, but I've been in your spot. You can't be conservative and expect to make enough money to hold your interest. In the real world ain't nobody going to put in the hours this endeavor takes while making 20 bucks a month. Just ain't gonna happen.
What this means is you better be damn sure about your buy signals. You best have a specific profit target based on something other than, gee it would be nice to make a hundo. You best have a stop loss based on something other than, FUCK, how much further than this go down? Those things are ATR(average true range) for your stop and R(resistance) for your profit point. Support is a good spot to buy in assuming your buy signals are lined up. What are your buy signals? Good question, they're different for everyone. Subjectivity is what moves the market.
I ain't trying to bust your balls, or smash your hopes and dreams. Like I said, I've been there, right where you are. Little account has to take bigger risks and that's just the way it is. Good luck!
One more thing, when swing trading I use 1/2 the ATR for my stop. That allows me a fairly quick exit if I'm wrong about direction. Assuming I don't get stopped out I then back the stop up to the actual ATR the next day allowing me to hang with the trade until my profit is hit. If I keep getting stopped out I need to first work on my entry signals. Backing up the stop only keeps my entry signals sloppy. Good entry equals being able to trade with tighter stops.
 
Quote from cashmoney69:

Did you read the post I made in Forex?.. Because I have over 12.3 k... over 20k with margin....
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No I didn't! I don't trade forex so I don't read the posts over there. If you have more you can be more conservative, obviously. Be careful, margin cuts both ways.
 
Quote from cashmoney69:

I was reading through "Come into my trading room" last night and Elder talks about the 2% rule.

This tells traders how large a position they can take on a trade. Example:

your account is 50,000

you buy XYZ at 20, your profit target is 26 and you set stops at 18.

How many shares should you buy?

According to this rule, you multiply .02 by 50,000 which is $ 1,000, the max risk you may take. If you buy at 20 with an 18 stop means you'll risk $ 2.00 a share.

Divide the 1,000 dollars by your risk of 2.00, gives you 500. So 500 shares is your maximum.

Do any of you use this rule?

Some people say this is too high and to use a 1% rule...

- nathan
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2% is based on longer term trend following systems typically having a win rate of around 45% and is derived using a risk of ruin calculation. The idea of using 1% when starting reflects the fact that most beginners make extra mistakes which reduce the effectiveness of the system so it helps reduce the risk of blowing out early.

The other part of money managment is that this is just for 1 position. If you have multiple diversified positions (and no, shares are not well diversified so you'd have to step the numbers down) then you can have a total portfolio heat of 15% to 20% (so you might have 10 2% risk commodities positions.)

But remember that these are approximations and a systematic trader would probably use modified (more conservative) Optimal F calculations to work out what 2% and 20% should be for their system.

Re how do u work out 2%. If you have 100,000 trading equity then 2% is simply 2,000. You then work out your risk to the stop plus average slippage and commission and divide 2000 by the sum to work out how many contracts/shares you can purchase.

Reading Van Tharp is not a bad place to get a grip on this stuff.
 
Quote from cashonly:

I'm not a fan of exit strategies like this.

What you are doing is basing your trading on your account, not the market. The market doesn't give a rat's ass about your account, so don't be surprised if you get shaken out of a position only to see it turn right around and go in your favor using this type of exit.

What you need to do is determine how much room you need to give a position based on that particular instrument's volatility, support/resistance points, timeframe you intend for the trade, etc. THEN, look at that percentage and see if it is within a tolerance for your account... if it's not, adjust your position size for that instrument so you can keep within your 2% (or whatever # you feel most comfortable with). If you can't or don't want to adjust your position size, then find another instrument (ie if trading stocks, trade a different company, if commodities, try a different one, etc.)

While it is important to have these type of rules, they should be based on what you're trading and it's characteristics, not what you have in your account.

Cash
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Its not an exit strategy. It doesnt set your stop.

You set your stop properly (volatility, structure, whatever suits) and then you use the 2% (or more accurately assessed number) for determining how much to risk on each single position. You then use the diversification of your portfolio to set portfolio heat.

Its about Money Management not Trade Management
 
Quote from cashonly:

I'm not a fan of exit strategies like this.

What you are doing is basing your trading on your account, not the market. The market doesn't give a rat's ass about your account, so don't be surprised if you get shaken out of a position only to see it turn right around and go in your favor using this type of exit.

What you need to do is determine how much room you need to give a position based on that particular instrument's volatility, support/resistance points, timeframe you intend for the trade, etc. THEN, look at that percentage and see if it is within a tolerance for your account... if it's not, adjust your position size for that instrument so you can keep within your 2% (or whatever # you feel most comfortable with). If you can't or don't want to adjust your position size, then find another instrument (ie if trading stocks, trade a different company, if commodities, try a different one, etc.)

While it is important to have these type of rules, they should be based on what you're trading and it's characteristics, not what you have in your account.

Cash
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Actually you and he are talking about the same exact strategy.
 
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