If you are a trader then you should follow some risk management techniques and one of the most common and basic is the 2% Rule. We will discuss in detail about this rule and analyse how by applying this 2% rule in your trading so that you could save yourself from big losses.
What Is the 2% Rule?
2% rule is a trading strategy where an investor or trader will risk no more than 2% of their available funds on any single trade. To implement this, the trader will have to calculate their entire portfolio which they have allocated for trading. Then they will devote only 2% of their capital in one trade. Even if they know or feel, the trade will be very profitable, they will not risk or invest more than 2%.
How the 2% Rule Works
By using the 2% rule in your crypto trading, it will make it extremely less likely that your account is wiped out completely. Since you are risking only 2% in each trade, the maximum you can lose in each trade is 2% of your portfolio. Keeping your losses small will give you more opportunities to trade and make constant income.
The 2 Percent Trading Rule
Let suppose you have a trading capital of $10,000. So in this case you will trade only 2% in every single trade which equal to $200. So in one trade you can lose only $200 if the trade goes in the wrong direction. It leaves you with $9800 to trade again and recover your loss. Even this $200 loss (in this example) can further be minimized if we use a proper stop loss.
How to Apply the 2 Percent Rule
You may follow the below steps to apply the 2% rules to your trades.
1- Calculate the 2% of your trading capital or trading fund. Do not mix your long term investment with trading fund. You should know the difference between trading capital and investment capital. Investment funds are for long term and they should not be used in day to day or swing trading.
2-You may deduct the trading fee according to the platform to be more precise. This is optional step because trading fee is very minimal.
3- Calculate you risk per trade.
4- Apply appropriate stop loss so your risk is further reduced.
By using this 2% rule, even if you make a loss in your 10 consecutive trades, you will only lose 20% of your portfolio (even less if stop loss is in play)
We never know when the market conditions change, using a 2% rule with stop loss will give you piece of mind that your account will not be liquidated in case of wrong trade.