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The 2 percent rule is a simple risk management strategy that controls the maximum amount you can lose for each invested asset.
The rule here is very simple: Never risk more than two percent of your total capital on any single stock. If you end up having 10 consecutive losses, that would only cost you 20% of your capital.
Here is how the 2 percent rule works:
- First we calculate the dollar amount that represents 2% of your capital
- You enter the maximum percentage of risk per stock and we use that to calculate the maximum risk per share. This is very easy to calculate if you have a stop loss in place. If you have, let us say a 10% stock loss then the maximum risk per share is 10%.
- Finally we calculate the number of shares you are allowed to buy for each security and update the default number of shares generated by the simulator during the backtesting.
Before applying this strategy to your trading system, make sure you put a very high number in the "Number of positions" field (In the first screen after you create or edit a trading system). Something like 100 would do it.
Also make sure you know exactly your risk per trade. For example, if you add a stop loss of 10% then you would know that your risk per trade is approximately 10%. You can enter the percent risk per trade under the "Maximum % Loss Per Stock" field under the "Money management variables" panel in the simulator manager.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
