The 2% Rule and leverage

[alwaysLearning]

The oldest mistake in the game is the position sizing rule. From discussions in other threads about the dangers of leverage it is clear that people think because they(CFDs Futures etc) give you huge leverage that means you can take on large trading size. This is wrong.

If you take the simple rule as risking no more than 2% of your account on any one trade it simply doesn't matter what you use to trade you will always purchase the same amount of shares if you are using CFDs, Margin loan or direct share purchase. THIS IS VERY IMPORTANT. IN FACT THIS IS THE MOST IMPORTANT THING TO TRADING.


you can play with this excel sim

Put in 6% risk per trade and run the sim 5 times. You will blow up on my testing 2 out of 5 trials even with a positive expectancy. Then put in 2% you may lose but not blow up.

Its not sexy but it works. no more than 2% of your account on any trade.

In my brief study of foreign exchange trading, a lot of the users who were experienced said to not to spend more than 2% per buy either. That's interesting for me to see the same rule applied to shares.

Anyway I'm a shares newbie so I don't know much yet

 

[Trembling Hand]

In my brief study of foreign exchange trading, a lot of the users who were experienced said to not to spend more than 2% per buy either. That's interesting for me to see the same rule applied to shares.

That is the fundamental point. It doesn't matter what you trade Futures, Forex, Stocks, options or probably horses. Don't risk more than 2% as a stop.