The 2% Rule, is it margin dependent?

Trading Discussion Risk Management Practices
1

So everywhere in my reading I see the 2% Rule - Don’t risk more than 2% of your trading capital on any one trade.

This makes sense to me, seeing as elsewhere in my reading I see that many FOREX trading accounts often offer 50:1 margin. So if I have a $1000 trading account, 2% of that is $20. And $20 leveraged at 50:1 margin is $1000.

That means that if I go long on a currency, my $20 allows me to control $1000 of that currency. And if, for what ever reason, the currency I go long on suddenly goes to ZERO, then the maximum I would need to pony up for a margin call is what I already have in my trading account, $1000. As long as I followed the 2% Rule then I would never have to reach into my own pocket to cover a margin call.

What I’m wondering is, what if my broker only offers, say, 20:1 margin? Could I then up my positions to 5% of my trading account per trade?

Now I [I]KNOW[/I] I’m ignoring a [I]TON[/I] of other considerations - Out of every 100 trades I win [I]X%[/I] of them, and when I lose I lose [I]$Y[/I] but when I win I win [I]Z($Y)[/I], therefore my Risk of Ruin for a statistical clustering of two Standard Deviations is etc., etc…

But that’s just it, I’m ignoring them.

Is the 2% Rule pegged to 50:1 margin, and if I only have 20:1 margin available can I go to 5%?

2

You’re making a hash of leverage, margin, risk, the 2% rule, and margin calls. Let’s try to sort it out.

[B]50:1 refers to leverage,[/B] not margin.

[B]The margin percentage corresponding to 50:1 leverage would be 2%.[/B] This 2% required margin percentage has nothing to do with the 2% rule you are asking about.

The 2% rule refers to [B]risk as a percentage of account balance.[/B]

Risk is defined as the loss (in pips or in dollars) that would occur, if your position is stopped out.

Let’s use an example to illustrate risk.

Let’s say you open a 1-micro-lot position in GBP/USD, and let’s say that you place a 35-pip stop-loss on this position. We know that each 1-pip move in this position is worth $0.10, because that is true for all 1-micro-lot positions in pairs of the form XXX/USD. Therefore, the dollar-risk associated with your position is 35 pips x $0.10 per pip = $3.50.

Your dollar-risk was determined by (1) the pair you traded, (2) the size of your position, and (3) your stop-loss. Your account leverage and your account balance had nothing to do with this calculation of risk.

If your account balance happens to be $1,000, then we can calculate that your risk ($3.50) is 0.35% of your account balance.

Suppose you want to apply the 2% rule. This rule states that your risk (at stop-out) should be 2% of your account balance (not 0.35%, as in the above example).

In order to increase your risk to the 2% level desired, you must increase your position size. This is tricky to calculate by hand, so it’s fortunate that there are Position Size Calculators for this purpose. Babypips has a good one.

You enter the metrics for your trade into the Position Size Calculator, click Calculate, and you get this:

The Calculator is telling you that your specified risk percentage (2%) and your account balance ($1,000) combine to yield a risk amount of $20.

And, given your specified 35-pip stop-loss, the position size that corresponds to that exact risk amount is 5,714 UNITS of GBP/USD.

What if your account does not allow you to trade in individual UNIT amounts?

Then, you will have to scale back the size of your position to 5 micro-lots (which is only 5,000 UNITS). You can’t scale up to 6 micro-lots without exceeding your 2% risk rule.

If you adjust the size of your position down to 5 micro-lots, what will your actual risk percentage be?

Actual risk percentage = 2% x (5,000 / 5,714) = 1.75%.

And that’s as close as you can get to the desired 2% risk, without exceeding it.

I hope that clears up your confusion,

.

6 Likes
3

So you’re saying that my risk [I]at stop out[/I] should be no more than 2% of my total account? That is a [I]very different[/I] explanation of the 2% Rule than I have seen, several times, elsewhere in my trading research. [I]SIGNIFICANTLY[/I] different. I had always understood the 2% Rule, because it was explained to me that way, as that no one total trade should be more than 2% of your total trading capital.

Can anyone else chime in regarding the general of the 2% Rule?

4

You have a full, detailed, correct proven answer above? What more do you want to know?

Sounds like you already know what you want to be told, regardless of if it is correct.

2 Likes
5

Only in complete agreement with Clint, because what he said was perfect.

Saying “your risk at stop-out should represent no more than 2% of your account” and saying “no one total trade should be more than 2% of your total trading capital” are just two slightly different ways of saying exactly the same thing.

You’re confused between margin, leverage and risk, as Clint explained. The “2% margin” isn’t related in any way to the “2% risk rule” you’re asking about here.

(I happen to think 2% is far too high, but perhaps that’s just me and in any case it isn’t relevant to what you asked.)

6

Hey

I have uploaded tool here, risk manager or alike… you can set lot size and risk percent(%),
based on that - it calculates & set SL for your trade… quite comfortable for some trades…
at least, you see your 2% and can move SL anywhere after…

PS: but it doesn’t set SL for big accounts and low risk percent, because sometimes its 1000 pips
and more… and equal to trade as without SL

good luck

8

I am in total agreement with Clint above, but if you have a small account then 2% may be to small to trade with. So if you have a $200 account then 2% is only $4 which may be fine on a GBPUSD trade with a 40 pip stop and a lot size of 0.01. But with a GBP account a EURGBP trade with a 40 pip stop and 0.01 lot size will cost you £4 or about 2.6%.

Yes, everybody knows you need to be well funded and the simple answer is to put more money in your account or don’t take the trade.

But we all had a small account at one time or ended up with a small account at one time, so for all those with small to very small accounts I have a solution for you. Also as your account grows a 2% risk on all trades will be way to big a risk to take.

I trade exclusively with EA, so I wanted a solution that would automatically control my risk but allow me to make good profits too. Also I noticed in backtesting that as accounts size grew larger the profit and loss swings were scary.

My initial solution was to use a lot size of account/50,000, so on a $500 account this would be a lot size of 0.01. Any smaller account size, just use 0.01.
Account risk is then controlled by stop loss size only. This allows you to always take the trade and gain experience with small risk and small profits. Also account risk is lessoned as your account grows compared to a fixed 2% risk value.

However I then found an even better system that does have a greater initial risk on a small account but gives better profits and as your account grows the risk reduces. It works by using the square root of your account size. So with an account of $200 this would be $14 or about 7%. In real terms not a lot of money to loss, but if you get a winning trade then the profits are good. I started out with £500 so my risk on every trade was £22 and is now £32 as my account has doubled to £1000.

If my account ever grew to £50,000 then the risk per trade would be £233 not £1000 as it would be with a fixed 2%. My other system of using account/50,000, would be trading at £10 a pip, so for a 50 pip risk thats £500 per trade. So I believe using the square root of your account size is a better long term strategy than a fixed 2% and it allows you to trade in a controlled way with a small account that can still produce good profits.

3 Likes
9

Thanks for the reply. I did have one quick question, though.

In the quote above, what does “EA” stand for?

10

Everything what is expressed in % compares relative amounts, not absolute that’s why it doesn’t depend on anything.

11

@Trader009. “Expert Advisors are programs that allow automation of the analytical and trading processes in the MT4 platform. To create an Expert Advisor (or “Expert”), the expert editing program - MetaEditor - has to be opened from within the MT4 platform”.

Take a look at this link

Also, Google isn’t so hard to use… :scream:

12

the 2% rule is a great practice of careful trading. And I support this method by 98% :smile: .

13

But an even better one is to learn to work out for yourself what the appropriate percentage position-size is, from your own carefully monitored figures.

The so-called “2% rule” is just a TEMPORARY guideline for people who haven’t yet learned how to do that.

And the longer someone’s been trading successfully for, the more likely they are to suggest 1% rather than 2% anyway, but that’s a different matter. It’s worth noticing, though, that professional traders, making a living, are almost all advising LOWER position-sizing than 2% - and asking yourself why.

1 Like
14

the only problem here is for small accounts 1,2,3 % … the market could always hit your ST before it jumps to a TP. If you go with 1% on a micro account most often your trades will be closed automatically and you might end up loosing your account from being too careful.
It will look like driving between 30 - 60 km per hour on a highway… It will be a bad experience

15

That’s no more likely with a small account than it is with an account of any other size.

What you say makes no sense.

This is rubbish.

You’re just repeating misinformation here, and ignoring the valuable response above from someone who - unlike you - actually knows what he’s talking about.

1 Like
16

Take no notice at all, Quickly.

I’ve just noticed from his other posts and the website in his profile that he’s here to promote a financial “custody” business. So what can you expect?

17

That’s because they have much larger accounts and so therefore it doesn’t make sense for them to take that much risk. They can still make a ton while only risking 1% of say a $100,000 account. Whereas a retail trader trying to risk 1% on a $1000 account will most likely end up getting frustrated with the laughable gains and end up risking way too much and blowing up the account.

18

True, of course, but I’m not talking about their own accounts.

I’m talking about what they’re advising beginners with small accounts to do.

1% is plenty for a retail to risk on a $1,000 or smaller account.

Someone in that position who’s frustrated by their tiny gains needs to understand that the purpose of trading with a tiny account isn’t to make real income from it: it’s to gain experience, test and learn.

2 Likes
19

This is of course true, in theory, but the application of reality is too difficult for most.

20

It really does depend on the size of the account. Anything upwards of $500 - 1,000 is fine. An account of 100 - 200 would only be able to use 10 - 20 pips stops and would be more likely to experience a lot more stop outs, especially if new.

21

Well, um, no.

You could take a smaller position so the value of a single pip was smaller. Then you could set your Stop Loss to 40 pips instead of 20 pips. Then the total dollars at risk if you get stopped out would be the same, and you’d be less likely to get whipsawed.

Of course your expected Take Profit would have to be higher as well. Otherwise the reward isn’t worth the risk.