This is one of the most vital rules in forex risk management. It simply means not risking more than 2% of your account any trade you take. Risking only 2% of your capital keeps you long in the game and keeps your losses very low.
Why you should stick to the rule?
The risk level for your account is kept at a small amount to avoid un predicted changes in the market from wiping away your account. This gives you more chances to grow your account since your capital is preserved.
It’s very important to determine how much you are willing to risk before entering any trade, the 2% rule helps you to determine how much you can risk per trade and can trade consistently enough to stay in a game even after stomaching five consecutive losing trades.
However much your system may not perform in the first five consecutive trades as expected, the 2% rule will save you enough capital to stay in a game. You are always given a second chance to trade, evaluate and improve your system to a better standard.
The 2% rule is used by most traders and most of them have been in the game for a long time.
Managing your risks is a key element to being a successful trader. Losses are always going to occur but limiting the losses and preserving your trading capital are vital for staying in a game.
Considering my two friends Sarah and Sierra who had a big dream in forex trading but at the sametime couldn’t agree on who should manage their account. Sarah is an aggressive trader and Sierra is a conservative trader. Completely different traders.
So they decide to divide the money into two accounts so that each of them trades her own account but agreed to use the same system to trade. Each holding an account of $1000, Sarah risks 10% per trade and Sierra decided to take up a 2% rule risk per trade.
After a month’s analysis, the system records 5 consecutive losses from both accounts.
Let’s see what their current accounts would be now;
Sarah’s risk per trade; (10%×1000)=$100
Sierra risk per trade; (2%×1000) = $20
Their journal is as follows;
After five trades, Sarah had already made a drawdown of 50% while Sierra had 10% loss off her account.
Sierra’s loss was still insignificant and she still had enough capital to go for more trades. While Sarah was on tension scared that just more 5 losses can wipe out the account. It would take Sarah more five trades to get out of the game and Sierra still had 90% chances in the game.
Risk only that that can keep you in the game no matter the drawdown you have made. It is advisable to always consider 2% or less for each trade you take till your account grows enough, then you can put to 3-5%, only if you feel comfortable with it.
How do you get back to breakeven?
The bigger the percentage loss the harder it will take you to breakeven.
For instance from the example above, it would take Sarah to win more 10 trades to break even and Sierra would need only 6 trades to breakeven.
Risk per trade: Sierra, (2%×900)=$18 per trade and ( 10%×500)= $50 for Sarah.
To get the account back to $1000, Sarah needs 10 winnings trade; =(10×50)+$500= $1000
And sierra needs 6 winning trades to breakeven; (6×$18) + $900=$1008.
The bigger loss you make, the harder it is to get back to your original account balance.
So the 2% risk rule is not for only the conservatives but for those who want to consistently profit from trading. If you are so quick to yearn for bigger profits, your account will be wiped out so quickly and you be out of the game without knowing.
Ever wondered why alot of people still lose money in trading, it is just because they ignore such simple rules like the 2% rule.
Determining how much you want to risk per trade gives you a clear picture on making decisions for your trades and saves your account from heavy blows.
Stick to risk management rules and you will be able to consistently grow your money profitably.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...