What Is the 2% Rule?
The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade. To implement the 2% rule,theinvestor first must calculate what 2% of their available trading capital is: this is referred to as the capital at risk (CaR). Brokerage fees for buying and selling shares should be factored into the calculation in order to determine the maximum permissible amount of capital to risk. The maximum permissible risk is then divided by the stop-loss amount to determine the number of shares that can be purchased.
Key Takeaways
- The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade.
- To apply the 2% rule, an investor must first determine their available capital, taking into account any future fees or commissions that may arise from trading.
- Stop-loss orders can be implemented to maintain the 2% rule risk threshold as market conditions change.
How the 2% Rule Works
The 2% rule is a restriction that investors impose on their trading activities in order to stay within specified risk management parameters. For example, an investor who uses the 2% rule and has a $100,000 trading account, risks no more than $2,000–or 2% of the value of the account–on a particular investment. By knowing what percentage of investment capital may be risked, the investor can workbackward to determine the total number of shares topurchase. The investorcan also use stop-loss orders to limit downside risk.
In the event that market conditions change, an investor may implement a stop order to limit their downside exposure to a loss that only represents 2% of their total trading capital. Even if a trader experiences ten consecutive losses, using this investment strategy, theywill only draw their account down by 20%. The 2% rule can be used in combination with other risk management strategies to help preserve a trader’s capital. For instance, an investor may stop trading for the month if the maximum permissible amount of capital they are willing to risk has been met.
Using the 2% Rule with a Stop Loss Order
Suppose that a trader has a $50,000 trading account and wants to trade Apple, Inc. (AAPL). Using the 2% rule, the trader can risk $1,000 of capital ($50,000 x 0.02%). If AAPL is trading at $170 and the trader wants to use a $15 stop loss, they can buy 67 shares ($1,000 / $15).If there is a $25 round-turn commission charge, the trader can buy 65 shares ($975 / $15).
In practice, traders must also consider slippage costs and gap risk. These can result in events that make the potential for loss significantly greater than 2%. For instance, if the trader held the AAPL position overnight and it opened at $140 the following day after an earnings announcement, this would result in a 4% loss ($1,000 / $30).
FAQs
One popular method is the 2% Rule, which means you never put more than 2% of your account equity at risk (Table 1). For example, if you are trading a $50,000 account, and you choose a risk management stop loss of 2%, you could risk up to $1,000 on any given trade.
What is the 2% trading strategy? ›
Key Takeaways
The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade.
What is the 2% rule in stocks? ›
The 2% Rule. Not allowing a position to lose more than 2% of the overall portfolio. This can be prevented by proper position size and not engaging in any bad behavior as mentioned above. Use no more than a 20% stop loss on each position.
What is the 2% rule in swing trading? ›
Additionally, there are golden rules in the swing trading game. There is a 2% rule that says one should never put more than 2% of account equity at risk. On the other hand, there is a 1% rule that says the loss on a single trade should not exceed more than 1% of your total capital.
Is it possible to make 2 percent a day trading? ›
It is possible to earn 2 to 5% returns daily through equity trading, but it is not guaranteed. The stock market is a volatile market, and there is always the risk of losing money. If you are looking to earn consistent returns of 2 to 5% per day, you will need to have a high level of skill and experience.
What is the 1% trading strategy? ›
The 1% method of trading is a very popular way to protect your investment against major losses. It is a method of trading where the trader never risks more than 1% of his investment capital. The main motive behind this rule is in terms of protection – you are not risking anything other than what is available.
How do you calculate the 2% rule? ›
Following the 2% rule, an investor can expect to realize a gross yield from a rental property if the monthly rent is at least 2% of the purchase price. To calculate the 2% rule for a rental property you need to know the property's price. You could then take that number and multiply it by 0.02.
What is the 7% rule in stocks? ›
Always sell a stock it if falls 7%-8% below what you paid for it. This basic principle helps you always cap your potential downside. If you're following rules for how to buy stocks and a stock you own drops 7% to 8% from what you paid for it, something is wrong.
What is the 1% rule in stocks? ›
In essence, the 1% rule dictates that you never risk more than 1% of your trading capital on a single trade. This might seem restrictive, but its benefits are unparalleled.
Who is the most successful swing trader? ›
Paul Tudor Jones - Another famous swing trader is Paul Tudor Jones. Jones is a billionaire hedge fund manager who is known for his aggressive trading style. He is one of the most successful traders of all time, and he has a net worth of over $5 billion.
The rule suggests that a trader should never risk more than 3% of their total trading capital on a single trade. Here's how it works: 1. Determine your total trading capital: This is the amount of money you have set aside specifically for trading stocks.
What is the 5 3 1 rule in trading? ›
The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.
Can you make $200 a day day trading? ›
A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.
How much money do day traders with $10000 accounts make per day on average? ›
With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].
What is the 3 5 7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What are the 2 types of trade? ›
Generally, there are two types of trade—domestic and international. Domestic trades occur between parties in the same countries. International trade occurs between two or more countries. A country that places goods and services on the international market is exporting those goods and services.
What is trade 2 trade? ›
Trade to Trade (T2T) is a stock segment where you can only buy and sell shares by taking actual delivery of the stock, which means you can't trade them on the same day. In other words, you can't do quick buying and selling (intraday trading) with T2T stocks.
Which trading strategy is most accurate? ›
Trend trading strategy. This strategy describes when a trader uses technical analysis to define a trend, and only enters trades in the direction of the pre-determined trend. The above is a famous trading motto and one of the most accurate in the markets. Following the trend is different from being 'bullish or bearish' ...
