Tuesday 22 November 2016

That 2% Trading Rule

It's quite easy for us trading veterans to sniff out whether a blogger is writing from personal experience or just copy paste (more polite word for plagiarism) from some other official sources.

To a "bei kambing" or "white paper", since you know nothing, you'll just swallow hook, line, and sinker wholesale. That's until you have chalked up more experience points and now looking back, you'll just laugh it off.

It's part of the journey.

Never risk more than 2% of your trading capital per trade

Let's take the above risk management rule as example.

Can't go wrong with parroting this rule right? Wrong!

One, you reveal to the world you are NOT a trader. (I never understand such financial bloggers. Don't trade but like to write about trading stuffs!? For pageviews?)

Second, if you do actually trade part time, that will put you in the same basket with those people who say one thing; but do anything. Be honest now, do you employ that 2% rule in your own trading?

Institutional trading not the same as retail trading

That 2% rule is meant for institutional or proprietary traders.

Depending on the institutions, some may argue 2% is too risky! Some have a more conservative 1% or 0.5% limit on their trading positions.

For a bank forex trader, if you employ a 2% limit on your $10 million position, you are risking $200K per trade!

If you are his boss and this trader is inconsistent, would you allow him the full 2% limit?

And if you have friends who are trading their own money full time, go ask what limit they use when they first started out

I guarantee you the majority of them would have used a limit greater than 2%!

Don't just believe what I say, verify for yourself. Wink.

Ownself check ownself

If you are already trading part time for sometime, no need to ask others.

Yup, that's the reason why the majority of retail traders blow up their trading accounts.

But if we had stuck with the 2% trading rule, we would be "eating grass" when we win... And that's not what we have signed up for... Didn't we?

Intermediate to Advance trader

How to know your have improved as a trader?

Most people may think of trading account size. Yes, its a factor. But not the most important yardstick.

Its this fuzzy, grey, and vague thing called Wisdom.

I know, the left-brained precision people will raise you arms in despair! You can't put a SMART goal to wisdom!

LOL! (Its not that I don't set goals or make plans; I just set them different. Wink)

Wisdom comes from experience. Knowing when to bend the rules, when to break them. When to verify and dig deeper, when to disregard "noise" or "falsehoods".

And that's different from Knowledge.

Any studious trading newbie can "out knowledge" a trading veteran. What's the definition of this and that; who said this and that; parrot, parrot, parrot. Sure score distinctions in a trading theory test!


When I started out trading full time 4 years ago, I employed a 5% limit on my trading positions. Now that my trading account has grown by quite a bit, my trading limit is now closer to the 2% limit.  


  1. i used to put 2% limit but some of my trades now have no limit and i exit at a certain time win, lose or draw :)
    like that means what har?

    1. You mean option trading as passive income?

    2. Jimmy,

      Then you have gone full YOLO!


      Jokes aside, I see you have moved on to time-based stops - that's advanced level stuffs; interesting...

      Looking at your trading chart, I see you have made, gave it back, made again, gave it back again, and made one more time...

      I'm not sure you have fully grasped the essence of time-based stops (or stops in general).

      "i exit at a certain time win, lose or draw" - don't make light of what you've just said.

      Its used by some hedge fund managers - for eg, some will cut their positions if their thesis do not pan out within 2 years - that's using a time-based stop ;)

      The trick of money management is when we were right, we made a lot more than we were wrong.

      And if we were wrong, we give as little as possible back to the market.

    3. yes i am still doing the cha cha, i win some and lose some overall i am progressing :)

    4. Jimmy,

      Yes, you only live once.

      That means I won't be surprised if your trading account blows up one day. It's a matter of time.

      I not cursing you hor! Just plain statistics ;)

      Making money is not that difficult in trading. Keeping the profits? Now that's what separate the pros from the amateurs ;)

      Have fun exploring what works for you!

    5. wah lau eh look down on me leh
      pour cold water leh
      so u pro la wah lau eh
      pro also will have losing streak 1 leh not a god
      i trading close to 1 yr and at least need some encouragement mah ...
      haizz surprised u said such things ...

    6. Jimmy,

      You not new reader ;)

      Just removed the sugar-coating to verify whether its "bravado" or "deep conviction" the comments you made.

      I'll let you be the judge from your response, which is which ;)


  2. I am retired and am a man of leisure. I am looking for like minded group of friends to engage socially. Is there any chance to organize kopi session like once a month just to share experiences and opportunities?

    1. JC Goh,

      Recently, we've been having to quite a few kopi sessions with CW and fellow bloggers. CW just retired ;)

      Do check out CW's blog to see if you can "tahan" his "bawu": http://createwealth8888.blogspot.sg/

      If still interested to meet up, can you write to me at the bottom "Jio me for coffee" column?

      This way I can invite you to our next kopi session.


      1st meeting kopi on you! That's the initiation rite.

      Then subsequent meetings we rotate ;)

    2. Hello JC & SMOL,

      I would like to join the kopi session also, if you guys are organizing one. Hmm..must buy first time...where is the cheapest kopi ah? Still got $0.80?

    3. WY C,

      Funny how I was discussing with CW recently maybe people would buy us drinks just to see us tear each other apart in real life.

      Ask a question and you will get 2 completely different answers? Consider both sides of the story?

      OK, I lied.

      You'll more likely to get one "wah kali gong" answer and 1 question back ;)


      Sorry hor. CW like Ya Kun. So cannot go below that. But if we add another 1-2 more persons, then the cost of buying kopi for CW and me will go down by quite a bit ;)

      I think 5-6 persons will be the max.

      Warning: CW and I only do weekdays.

      I work weekends, and weekends are reserved for family for CW (that's having his priorities right).

      Stay tuned. But don't hold your breath. Holiday mood.

    4. SMOL,

      Wow, next time if Ya Kun IPO, must subscribe...got kopi fans some more. I am fine with it lah, just joking...Kopi $1.60, meet SMOL, CW and others priceless (not my script..copy from an advertisement). I am fine with weekdays, so let me know if is ON.


    5. W Y,

      No worries!

      Just like that, we know you are a man of leisure too ;)

  3. Hi SMOL,

    Frankly, I don't use the rules. But interestingly, I just did some calculations, and found that my position sizing is about 5% of my portfolio (including cash). I can also do half position, so it'll be about 2.5%. It's just what is comfortable for me. It appears I arrived at roughly the same advice as what the 2% rule is all about.

    And I'm going to break the rule soon by doing a 7.5% haha! But I suspect if I do get a counter to that sizing, I'll sell down back to 5% when I can.

    1. LP,

      That's because you are not using leverage ;)

      This risk max 2% of trading capital per TRADE is for traders using LEVERAGE.

      If I used 10:1 leverage in an all-in trade, a 10% move in my favour would double my trading account.

      Conversely, a small 10% move against me... My trading account would be wiped out!

      Therefore, this 2% rule comes with the use of stop-loss as given ;)

      I am being "conservative". You should see some newbie forex traders using 50:1 leverage!?

      Of course 90% of traders will lose money!!!

  4. LP and Smol,

    I noticed in recent years, my entries is about 5% of portfolio size.

    It could b 10% if I am convinced, but for the last 3 years, those bets are few.

    I was looking at my records of my "younger days" 6-7 years ago, wha I one time entry for LMrt alread 35% of my port size. Lol

    1. Sillyinvestor,

      What you and LP are doing is not exactly the risk max 2% trading rule.

      You are still wearing your "investor" hat.

      What you doing is more risk management at portfolio level - diversification.

      You are ensuring that if a single stock blows up, the damage to your portfolio will be minimal.

      This 2% trading rule is to ensure the trader can live to fight another day. To loose 20%, he has to loose 10 trades in a row...

      This 2% rule is a way for traders to adjust their position size to fit their stop-loss points or vice-versa.

      For eg:

      $100K portfolio or trading account.

      Let's assume no leverage to make things easier.

      Max 2% loss/risk per trade will be $2000.

      a) If its an all-in $100K trade in one stock, then your stop-loss will be 2% away from your entry price.

      b) If position size is $50K, then stop-loss is 4% away from entry price.

      c) If position is $10K, then stop-loss is 20% away ;)

      Now add in leverage that's where the fun starts!

      Tip: Any retail trader who says he does not use stop-loss can only mean 2 things:

      1) He is great at entries! Great market timer!!!

      2) His trading account is tiny.

  5. you trading full time already? i thought all the while you are doing it part time!

    1. 2% rule? thats very old fashion!

    2. coconut,

      I've been trading and investing full time since 4 years ago.

      The first year I came back, I was getting used to Singapore - so don't count.

      Beginning of 2013, I opened my personal nano-hedge fund.

      Trader is me.

      Buy-side analyst me.

      And hedge fund manager also me ;)

      Trading is just a small sub-set of my hedge fund - something to keep me occupied will waiting for the big moves for the investment side ;)

      My honeymoon from retirement only lasted 18 months... Mondays to Fridays got things to do; but weekends...

      That's why I went back to work during weekends for near minimum wage. I think a lot of students earn more than me! LOL!

    3. oh, then i must have been mistaken, thought you were very free everyday haha....

      ya, investing, i had been buying reits for investment lately, didn't you see they had been beaten up prety badly?

      regarding 2% rule, up to individual risk appitite, more importantly is the overall equity/portfolio risk, not individual trade.

    4. coconut,

      Actually I am quite "free". My style of trading does not need me to stare at the screen whole day.

      I spend most of the time "thinking" and "waiting" ;)

      They are joined at the hips - risk management per trade will affect portfolio level; and vice versa.

      Of course this 2% trading rule is just a starting point. I wouldn't call it "old fashion". Maybe basic 101? Like 站马步?

      There are other risk management techniques like Pairs Trading:

      1) Short DBS and long OCBC;

      2) Long WTI crude and short Brent crude.

      Then there is hedging our positions with futures or options.

      Nope, that 2% rule is not mandatory for advanced traders ;)

    5. thats spread or more correctly, arbitraging. people who spread the yeild curve are getting hammer, becareful!

      nowadays, i suggest go for the simpler trade like swing trading.

    6. as far as i'm concern, there is no rules that can fit into the market cos market changes all the time! your rules if you have them, should change according to market changes.

    7. coconut,

      I am not into bonds trading although I did want to short US bonds a few years back. Lucky I didn't. That's a widow making trade...

      Although Trump's recent win finally gave those who shorted bonds a reprieve...

      No, I monitor the bonds market as one of my inter-markets trading indicators.

      Just like options, bonds' spreading terminology quite interesting - what steepeners and flatteners?

      I'm not that smart. Like what you've said, I express my interest rate views through plain vanilla direction plays with currencies ;)

    8. coconut,

      Exactly. No 2 markets are the same.

      What works yesterday may not work today.

      Hence you can't short-cut trading experience and wisdom.

      Knowing when to chuck out the tried and test rule book and use a new playbook requires adaptability and responsiveness to change.

      That's easier said than done.

      For example, using the Simci to hedge my equity is not working so well beginning of this year. Guess what? I found using one currency pair to hedge works better!

      Trying and exploring new techniques and tools is part of my "thinking" ;)


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