I read 2% capital (account size) stop loss per trade is the "sweet spot" for most traders. Does anyone run it tighter or looser here? If so, what % capital stop loss do you use?
That rule is likely for position traders and investors. Most well capitalized day traders don't run that high.
First, "capital" and "account-size" aren't necessarily the same thing (in fact, I'd suggest that they're rarely the same thing). Secondly, I'm guessing that the reason you see "most traders" saying that is that your source of information, from which you're forming that impression, is "traders chatting online" (i.e. websites, forums, Youtube, etc.) and I'd suggest that what you're actually looking at isn't meaningfully "most traders" at all: it's perhaps mostly a self-selected section of the enormous and frequently changing turnover of "people who aspire to be traders but aren't really", including those attracted by the potential outcome rather than by the process. Thirdly, I think 2% is an enormously high figure, and pretty misleading, and I'd venture to suggest that the great majority of people exposing as much as 2% of their capital to risk on any one individual trade (who don't change their ways) won't still be trading 5 years later: it will - for most of them - be "something they tried to do in the past" before deciding that "trading doesn't work and it's all a scam, anyway". Fourthly, I think that people trading successfully, over the long-term, with that sort of position-sizing are probably, overall, much closer to what I'd call "investors" than "traders". Fifthly, it depends on exactly how you define the terms and how you work it out: I know of people who trade stocks who consider their "position-size" to be the proportion of their account-funds that they put into one stock (rather than the proportion of their account exposed to risk in the trade - which can be something very different, if they have a stop-loss) ... I'm not saying they're "wrong", but they're certainly using language differently from most other traders I know, and the terminology is ripe for confusion, anyway. In my misspent youth, when I first started off trading - like quite a few people, I started off uneducated and undercapitalized, trading spot forex against counterparty "brokers" using grotesquely high leverage, ridiculous position-sizing (though never as high as 2% of my account - 1% was my absolute maximum for my rare, highest-probability, highest-win-rate trades), I was full of unreasonable expectations and (briefly) thought that 2% was perfectly sensible for people who wanted to risk that much. So the highest stop-loss I've ever used, myself, represented position-sizing of 1%, and that rarely and only at the start, and that was 1% of account-size, not 1% of capital ... and it was too high (though I did actually get away with it). People who survive for the long term tend, overall, significantly to reduce their risk-exposure per trade as their accounts grow. People who look at trading in terms of "how much you can make" use bigger position-sizes than people who look at it in terms of "drawdown-avoidance and risk-management". The former group doesn't survive for the long term; some of the latter group does.
That's because most traders target 1-2% return on capital per month, simple math. Fixed stops work until they don't, and when they don't most people adjust them and lose more until they remove the stop and the markets move against them causing a margin call evaporating their capital. Right, you don't think markets have this built in to them, that's the difference between those who have 10,000+ hours of experience and those that don't. Now, what do I do, that's complicated because I'm the only one using the approach, breakeven least worst. Occasionally I do take a minor haircut, measured as a fraction of percent, because I have to go out or it's taking too much time to finesse back to neutral. The simple point is that if you have perfect entry, there is no risk to capital, but because no one outside of the top institutions have the fintech nor methodology, they have to offset winning trades against losing trades hopefully being net positive in the end. I'll put the stats up again. 100ms charts 15–20% per day across 3–5trades 1sc charts 15–20% per week across 3–5trades 1mn charts 15–20% per month across 3–5trades 1hr charts 15–20% per quarter across 3–5trades 1dy charts 15–20% per year across 3–5trades This is how much I trade, and only across a few select instruments, and only if that instrument is showing a signal of an event, otherwise I ignore it, take a working holiday (Tuscany this week), or do some fintech work (this week as well). Ignore the pomodori cans, I wasn't going to bring my 20kg dual monitor stand with me and it turns out you can't buy vesa stands even at the Media Markt. A fixed stop works if you follow the rules exactly, and know when to be out of the market, a floating stop works if you known when to be in the market, in all other cases they fail unless the gods are on your side that day, which in the financial markets is a rare event.
For a trader, you should be able to function with 0.5% risk on your capital for a trade. The size of your account may not be relevant if it's small compared to your capital. That is, you could wipe out your account and then restock it with some of your other capital. Of course... if you wipe out your account a couple of times, you're probably going about it the wrong way. If "account = capital" and you're trading on high leverage, you're at significant risk regardless. Example... Let's say your capital is $130k and you commit it all to trading the ES. The value of one ES contract is ~$130k right now, so you could be long or short "one" and not be leveraged on your capital. A stop-loss risk of .5% would be 13 ES points. Frankly, you shouldn't have to risk even that much except in periods of high volatility.
That is a very good point, however it brings up the other interesting fact, most people place fixed size trades. As I layer my trades in 3-5 blocks, I place, it's a bit more complex but these figures are close enough, 1.25% of account on the first trade, 2.5% on the second, 5% on the third and 10% on the fourth. Only scaling up if the previous was profitable, resetting for the next block if a loss (which is rare), and if neutral either resetting or staying static for a couple of trades, normally I'll just have a glass or wine and wait to the next range, be it a day, week, month. Now, those who are unintelligent, unaccredited, impatient, will point out that placing 5% or 10% of account on a trade is stupid, and using their approach that would be correct, people only understand what they know. However, if you are materially profitable on the first trade, materially profitable on the second trade, then any loss will take your account back to original capital, it will not be a loss of capital. And that is how the rich get richer, money makes money, and so on. They are not trading for income, they are trading for capital accumulation, and how I made +100% of my mid-size account in January allowing me to be rather lazy the past couple of months, new quarter so actually now have to do some work!
As a swing trade holding overnight often I am not going over 1% the majority of the time. Novice traders learn to follow all their rules, real good traders know when to break them. I give myself up to 3 'fat pitch' trades per year where I will risk up to 2% and will pile on to a winner with up to 5 times more size than all my other trades. When a market is at extremes - so am I.
This comes from Dr. Alex Elder ("Come into my trading room: a complete guide to trading": 2002). It certainly wasn't aimed at day-traders.
dr elder does not know what he is talking about stop loss should never be function of the predefined %