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The 2% rule will save you from blowing your entire trading account

by , 31 October 2013

Many traders who come into the market, blow their trading account to smithereens.

Simply, because they are not aware of the essential money management rules that they need to keep their portfolio balance afloat.

Well, I'm about to introduce to you to a rule, that could save your trading account!

It's a rule I've been following for almost a decade, and has helped my portfolio stay on a consistent uptrend (with winners and losers of course!).

Here's how it works!

Break the rule and you’ll break your account!

This 2% rule will determine whether you’ll make it or break it as a trader.

With high probability trades, you should not be risking more than 2% of your portfolio in any one trade!
So, let me explain further with an example…

Let’s say you have portfolio and on average, you’re willing to risk 7% of your portfolio in any one trade.

This is all fine and dandy if you’re only making a loss every now and again.

But with an unpredictable market, you never know when you’ll have to endure five to seven losing trades.
Take a 7% loss per trade, seven times and you’ll blow 49% of your portfolio!

Now in any business, 49% downside is not good and so, there are ways to mitigate your risk big time.

You should only risk a fraction of your money in any trade!

Let’s say you have a portfolio account of R10,000 and you know about the 2% rule.

The first thing to note is, you’ll only be risking R200 per trade.

Now you might be thinking “by risking so little, my gains will be too small to grow my portfolio”

But the key is to run your trading like a business where you take every trading signal.

Just keep at it and over time, with winners and losers, you’ll see your portfolio flying up before you know it.

But now going back to only risking 2% per trade.

As I mentioned before, there are times where your trading strategy will go through a month or two of downside.

So you’ll endure those seven consecutive losers, if not more..

But if you do the maths, You’ll only risk 14% of your portfolio if you took seven losing trades. This is a lot easier to handle than losing a 49% chunk of your portfolio.

This is simply the reality of trading, so keep to the 2% rule and you’ll keep your losses to a minimum.

Keep in mind,



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Timon Rossolimos, Trading Building blocks, Financial Freedom



************************************************************************************************** Editors Note: If you'd like to boost your trading performance, success and learn more top insider tips and tricks Timon has learnt over the last decade then follow him on Twitter @timonr. ***************************************************************************************************


The 2% rule will save you from blowing your entire trading account
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