The 2% rule

This rule is simple and is divided in 2 corollaries:

1.?????You must never invest more than 2% of your capital per trade

2.?????You should target a 2% net profit rate per week (equivalent to 100% in a year)

These values can seem ridiculously small and I confess I did not started with such short quantities and low targets. But experience already taught me?that greed is a trader most dangerous sin.

It is true that around 75% of people lose money in trading. Most of them are able to do an accurate technical analysis but they fail because of greed: they are wining and want to earn even more or they are losing and want to revenge their loss.

To succeed in trading you need a risk management strategy to keep losses under control.

This means you must make a limited investment per trade and you must define a realistic profit target that balances gains and losses.

I'll give you an example of how I started.

I started big, making 500€ investments per trade. Please do not follow this example!!!

My target was a 10% return rate and my beginners luck showed me that this goal was not difficult to attain. I was expecting to get at least 50€ per trade and that meant that If I made 4 profitable trades per day I would be wining 200€ on a daily basis. In such circumstance I would make 1.000€ per week/ 4.000€ a month. With such statistics I looked at the prospect of trading with greediness.

However, in trading sometimes you win and sometimes you learn.?

For someone who is starting, a 50% success rate is already an achievement.

But this means that if you make 4 trades per day, 88 trades per month, you will only be earning money in 44 trades. Let's say you won 10% in your positive deals but you lost 10% in your negative deals. Your final outcome is zero. This was me in the begining...

Using the same example if you have a 55% success rate you’ll only get profit from around 48 trades each month. With a 500€ investment per trade and the same 10% success rate you’ll be earning 2.400€ in a month. The problem is that you’ll be losing money in 40 trades. If you lose 10% per trade the total loss will be 2.000€ so your net income corresponds to 400€.

Why risk so much money per trade if your potential net income is so low? It is preferable to have more trades running with a lower investment per deal. Your potential profits won't make you jump and celebrate but your potential losses won't prevent you from sleeping...

You should start trading only if you accept that losing is a certainty.

With that in mind you must then define a reward to risk ratio that can provide you the net income you target.

For instance, if you have a 50% success rate and are willing to take a maximum loss of 10% per trade, to assure a 10% net income, your reward to risk must be 3:1 meaning you need to win 30% per trade.

In the previous example, with 500€ per trade, if I had a 50% success rate with a 3:1 reward to risk ratio I would have on each month: 44 profitable trades with a 6.600€ profit (150€ per trade x 44) and 44 non-profitable trades with a 2.200€ loss (50€ per trade x 44). The net income would be 4.400€.

Honestly, a 3:1 reward to risk ratio is not that easy to achieve and a 500€ investment per trade is a risk you should not undertake if you are starting: in a bad week you can lose all your money!

I now use the 2% rule and have a profit target in value that is proportional to the amount of money I am willing to risk.

Don't be greedy: those who want it all will more easily lose more than they can afford.

My coaching experience gave some robustness and resistance to stress but I acknowledge that the more money you invest the harder it gets for you to keep cool, stick to your plan and stay focused.

Start small and try a demo account. Above all always be pragmatic and truthful to yourself. You are not competing with anyone, and you are not defying the market.

Trading is a "one man show" business opportunity and you must be an unpretentious leader: define goals that are manageable, don’t pressure yourself too much (if you want pressure stick to your normal job) and acknowledge that losses are a part of the deal.

Your empowerment comes from having a risk management strategy that absorbs such losses and still delivers a positive result.