2% rule does not make sense!

chibiks

Member
52 0
Say your account size is $25,000 and you are trading a stock in the $8-$10 range. You decide to risk 2% per trade... which gives $500, I buy the stock at $10 and it moves to $12 in 3 days, sell after commissions not much profit. But if I risk the $3500 or higher up to $5000 max, and set a 2% loss it makes more sense if I turn out a profit while setting a Stop at 2% of account. So how do you do it?
 
M

member275544

0 0
Say your account size is $25,000 and you are trading a stock in the $8-$10 range. You decide to risk 2% per trade... which gives $500, I buy the stock at $10 and it moves to $12 in 3 days, sell after commissions not much profit. But if I risk the $3500 or higher up to $5000 max, and set a 2% loss it makes more sense if I turn out a profit while setting a Stop at 2% of account. So how do you do it?
the general aim is to return 2:1 of your risk and some might even say 3:1 (the latter I cant achieve unfortunately). Your example is giving you just a 1:1 return so if your strategy is anything less than > 51% then immediately you are on the back foot.
Thats the returns side, now the other is to reduce your costs
Alternatively shop around for lower commission charges from your broker which will go a long way I suspect to aiding in this.
So, a better return:risk, and a lower cost will impact your bottom line. Think of it as a business and you cant go wrong
 

perox

Member
87 0
Say your account size is $25,000 and you are trading a stock in the $8-$10 range. You decide to risk 2% per trade... which gives $500, I buy the stock at $10 and it moves to $12 in 3 days, sell after commissions not much profit. But if I risk the $3500 or higher up to $5000 max, and set a 2% loss it makes more sense if I turn out a profit while setting a Stop at 2% of account. So how do you do it?

But your stop loss level is too short and high possibility to hit the stop loss.

Maintain a balance between the stop loss and 2% risk.
 

resistance

Member
89 1
You have made a very good point about stop loss. This tool is to prevent us from uncertain loss but if we keep putting close SL then it will keep hitting and can turn your account in big loss eventually.
 

Brumby

Established member
593 138
Say your account size is $25,000 and you are trading a stock in the $8-$10 range. You decide to risk 2% per trade... which gives $500, I buy the stock at $10 and it moves to $12 in 3 days, sell after commissions not much profit. But if I risk the $3500 or higher up to $5000 max, and set a 2% loss it makes more sense if I turn out a profit while setting a Stop at 2% of account. So how do you do it?

The 2 % risk rule is to establish the dollar risk on any given position. It is not used to directly size your position. I suspect you are confused on this point. The position size is calculated from the difference between your planned entry price and protective stop loss price. In the example that you gave on the $10 entry price, let's assume your protective price is $9. Your position size is therefore 500 units. If you take profits at $12, your profits is $1000 - hardly what I would consider as minor profits on essentially a $5000 position.
 
 
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