The 2% Rule
The 2% Rule is a trader’s risk management technique. With the 2% Rule, the trader will risk no more than 2% of his entire portfolio with any one position or trade.
This risk limit goal is actually a loss limit goal and can be applied by using stop loss orders that are set at an appropriate amount. If a trader has $10,000 in his trading account he will set his loss limit to any one trade at $200 or $10,000x 2% = $200. This loss limit or the 2% rule can be achieved by adjusting the stop loss to equal $200. The system works with a sliding scale and is designed for any trade size. If the trade size is $1,000, the stop can be set at 20% below the trade entry point, which would allow no more than a $200 loss ($1,000 x .20 = $200.) If the trade is $2,500 in value the stop has to be set tighter. In this case the stop would be set at 8% below the entry point or $2,500 x .08 = $200.
The effect of the 2% Rule is to never lose more than 2% with any trade, and has the effect of allowing for 50 consecutive losing trades before the trading account is completely zeroed out with losses: 100%/2% = 50 Trades.