2% rule on small accounts?

Discussion in 'Risk Management' started by melee, Aug 17, 2007.

  1. melee


    well what do ya think?

    in various books ive read about money management they usually tell ya to get out of a trade when your down, at a maximum of, 2%, so that you can take successive losses. well what about those of us who only have 10,000 bucks or less in there accounts? thats only 200 dollars! now, i look at that 200 dollar limit and say that means i can only do day trading or i have to have darn good timing on longer term trades.

    right now im am solely focused on gold futures and that represents only 20 ticks of price movement. i dont know how $200 is in other futures, stocks, or options.

    another way im thinking about going is just limit my loss on a trade to definite amount. lets pretend that i got 10000 dollars and a gold contract costs 2500. that leaves me with 7500 in my account. if i say 200 is my definite get out amount i can trade 37.5 time with 1 contract (not factoring in commission, profits, etc) until my account is empty. adjusting that amount effects more that how many times i can trade, it also effects the amount of market noise i can withstand on a trade.

    whats a low capital speculator to do?
  2. 2% doesn't work as well on small accounts, but it doesn't mean you forgive risk management altogether... you look for something more practical.

    I had a 2k account once, would've gotten killed on commissions. I took longer-term, more definite trades using a system that gave me about 1 or 2 trades a month. Winners outnumbered losers over 5:1, and the winners gave in the ballpark of 25%. I capped losers at 5% including commissions.

    2% will erode you constantly with noise, and small accounts are unfortunate enough to be forced to T+3 and settlement. But you have to define a point where you say, I'm WRONG ON THE TRADE and get out.
  3. 2% is refered to how much each position can lose.

    .02* Account Size = $ Max Loss

    $ Max Loss / $ Stop Size = how many shares or contracts to buy. Obviously you want to be conservative with your stop size estimate, the bigger the better.

    Your stop is measured in terms of volatility, either Standard Deviation or Average True Range, or some solid technical point, a bottom support level, etc.

    Like anyone else, a 2K account can have independent 5-10 positions risking 2% per trade. Just make sure you avoid costly brokers.

    IB or ETrade are good for small accounts, mind you IB doesnt really want your money if you've only got 2k.

    Be realistic with your self and realize that your probably in over your head trading any futures with only 2K nowadays. Its not 1960 and even Richard Dennis probably couldn't do it today with such a small account.

    You should probably stick with Gold equities. BGO, Newmont, Franco Nevada, etc....

    An internet search tells me the margin for a 100 ounce gold contract is $2700 so what happens when the inevitable margin call comes - you've been chewed up by Market volatility...
  4. ER2


    I think keeping risk at 2% (or less) is vital. The solution is to become better capitalized or you'll lose your $10,000 account.

    After wiping out two trading accounts I finally became disciplined in money management and don't ever wager more than 1-2% on any single trade. Being adequately capitalzed allows me to make decent money while keeping risk low -- something I never could have done with the small trading accounts I used to have.
  5. As I see it, there are two options in this scenario under which one could trade:

    A) Sim trade until you can trade with a greater risk % and have a high win rate to rely upon. If you have to risk more, you should have a more reliable system than most to trade. If you already have that, then great. At least this way you can make some profit and risk that instead of just your original capital. If you're going to risk over 2% per trade, you better have one hell of an amazing system to rely on.

    B) Get more capital

    Remember to set a % drawdown that you are willing to tolerate in the event of a losing streak or such before stopping. It should leave you with enough so that just in case you need the opportunity, you can revise your approach and live to trade another day.

    Also, I think that even 2% risk per trade is too high. Once you make some profit, try to keep it below 1%. It helps during the rough patches.
  6. 2% rule is just an over-rated rule that the "outdated"-Market Wizard book created. I am very very very sure that:

    1. Most of the MWs aren't trading anymore.

    2. The surviving MWs trade differently since the book.


    For small accounts, think in terms of lot size.

    By the time you have a bigger account and competency in risk, you won't be using any of those Tharp / Market Wizard stuff.
  7. hdawg87


    Well I guess if you want to trade options you can do verticals. F Sept. 7 Put / F Sept. 5 Put is a $200 risk. This is just an example but you get my point.
  8. You could trade the MidAm-Kilogram(33 ounce) contract instead of the 100-ounce contract at COMEX or CBOT.
  9. The 2% rule is one I subscribe to fully, but you are right, that this is a tough rule to enforce if you have a small account. I don't know if you guys are US based but being in the UK, I can make use of spread-betting to define the size/point for my (YM futures) trades, which in effect means I can risk as low as £1 /point on the YM ($2), which means if I have a £10,000 account and a strategy that requires a 40 point stop I can risk £5 per point. BUT if my account was only £2,000 I could still use the same strategy by betting £1 per point. All completely useless if you can't spread bet I guess! - The downside is of course the spread (around 10 points on the YM) which in effect means scalping is a no go.

    As alluded to elsewhere in this thread, the solution would seem to point toward developing some swing trading strategies which reduces the frequency of trading and, coupled with a strategy that makes the 2% rule feasible, could be used to at least start trading for real. I would start by developing a strategy that had me in positions for between 2-10 days and from that work on stops and targets (to deliver a satisfactory reward/risk ratio say, 2:1). Based on this I'de work out what size my stop would need to be to ensure I did not exceed the 2% rule. If the strategy was unworkable, I'de start again until I found either a strategy or an instrument that meant I could trade using the 2% rule.

    The 2% rule also works well from a psychological perspective as it is easier to think in percentage terms as opposed to real hard dosh (eg 'I lost £1,000 today' sounds worse than I lost 2% of my account - and this is part of my plan')

    My other key rule around RM is to never expose more than 6% of my account at any one time - in effect this means 3 trades that have not moved in my favour. The 2%/6% rule was developed by a guy called Alexander Elder - I've used a number of his techniques in my own trading strategy and I have to say, I have found them useful.
  10. I think the 2% rule is fine so long as you are jumping on board of a trending market that's moving in your direction.

    Many of the traders in Market Wizards were trend traders.

    Gold is lacking a clear direction and is not the best way to go.

    There are plenty of equities that are trending strongly and have powerful market sentiment.

    The trend is your friend....go where the money's going and your results will improve.

    #10     Aug 21, 2007