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TRADING GUIDE: 2% RULE

Please read carefully and understand proper risk management

Always follow this 2% rule before doing any trading activities.

RULES OF TRADING ALWAYS PROTECT YOUR TOTAL CAPITAL



#1. SET YOUR RISK/REWARD RATIO TO A MINIMUM OF 1:3

Knowing about risk/reward ratio (RRR) will improve your chances of becoming profitable in the long run, setting limit orders (stop-loss and take-profit) that protect your capital.


A RRR measures and compares the distance between your entry point and your stop-loss and take-profit orders.


For example


Let's say that you're shorting BTC/USD.

you have entry at 8500 and your stop-loss at 8600,

the distance between your entry point and your take-profit is 8200

then you would be using a RRR of 1:3 because you're risking 1% to earn 3% profit.


The risk/reward ratio is a necessary tool to set your stop-loss and take-profit orders depending on your risk tolerance, and every wise trader should control the downside risk.


Even though determining a RRR depends on each trader's risk tolerance, it's common to use a risk/reward ratio of 1:3, where you expect to earn 3 times what you're willing to lose.


#2. CONTROL YOUR RISK PER TRADE


When thinking about risks, you also need to consider your trading capital.


You should only invest a small portion of your trading capital per trade: a good starting point would be to not invest more than 2% of your available capital per trade.


Expert tip


If you have $10,000 in your trading account, the maximum loss allowable would be $200 per trade.


Determining the risk per trade is a helpful tool if you go through a losing streak, so then you can better protect your trading capital, and avoid large drawdowns in your trading account.


#3. KEEP YOUR RISK CONSISTENT


Most beginners will increase the size of their positions as soon as they're making profits, which is one of the best ways to get your account wiped out. Keep your risk consistent!


Just because you've made a few winning trades doesn't mean that the next one is going to be profitable.


Do not become over-confident and less risk-averse, as that will lead to you changing your money and risk management rules without solid reasons.

When you worked on your trading plan, you had to set up rules to decide about an effective size for your positions. This is just one step in establishing a successful trading method, now you need to stick to and follow your investment plan!



What are the things we need to avoid?


Avoid Revenge Trading - Revenge trading happens after a trader suffers a significant loss. Rather than look to their strategy and make sensible decisions around the incident, they jump straight back in.

And that's when things become challenging.

Angry, and determined to come out on top, the traders will find themselves in one of two scenarios. They will either end up ploughing a lot of money into a trade that loses, making their losses even bigger, or they will manage to come out on top a little, and simply reduce their loss.


How to overcome it?

here is a simple process of improvement that should help you manage any revenge trading issues. We're talking about 'on the day' stuff here. If revenge trading happens to you, and you start to incur losses, then consider the following steps:


1. Follow Proper Risk Management Never invest 100% or all in your total capital in just 1 trade.

2. Do not invest more than 2% of your available capital per trade

3. KEEP YOUR RISK CONSISTENT

4. ALWAYS PUT STOPLOSS

5. Always expect that trading is a game of Probabilities 100% accuracy doesn't exist that's why we have STOPLOSS in place.

6. Step out and clear your head after a frustrating loss. Do non- trading related activities and come back only once you've acknowledged that losing is part of the game.

7. Document the reasons why you lost your trade. Identifying what went wrong with your trade and focusing on improving your trading process helps lessen the feeling that the market is against you.

8. Practice risk management. If you make risk management a habit, then you'll have better trading discipline and are less likely to take impulsive trades. If you're not used to it yet though, then you can start with following strict rules on position sizes and trade duration.

Remember that even the most consistently profitable traders have bad trading days. It's all part of the game after all.

Don't take losses to mean that the market is against you. It doesn't care about your feelings or how sound your trade ideas are. It's our job as traders to trade what we see and not what we think. Let go of your ego and focus on getting one good trade after another.


We only have 4 Options in trading

Big loss

Small loss

Small wins

Big wins


Things we need to do:

Avoid Big loss

Eliminate Big loss - reason why we have STOP LOSS to avoid Big loss always put stop-loss in each trade.


small loss - If our stoploss hit we get small loss

How can we recover small loss?

We have Two options we have small wins and Big wins this small wins will cover small loss and Big wins will earn profits.


Important to be alert to raise your stop-loss to the entry price Breakeven once you reached your first target profit move to break-even scenario if things go wrong. You will be stopped with no loss/less damage. You can raise your SL each time you reach a new target.


Risking 2% vs. 10% Per Trade

W3Schools W3Schools

You can see that there is a big difference between risking 2% of your account compared to risking 10% of your account on a single trade!


If you happened to go through a losing streak and lost only 19 trades in a row, you would've gone from starting with $20,000 to having only $3,002 left if you risked 10% on each trade.

You would've lost over 85% of your account!

If you risked only 2% you would've still had $13,903 which is only a 30% loss of your total account.


Of course, the last thing we want to do is to lose 19 trades in a row, but even if you only lost 5 trades in a row, look at the difference between risking 2% and 10%.


If you risked 2% you would still have $18,447.


If you risked 10% you would only have $13,122.


That's less than what you would've had even if you lost all 19 trades and risked only 2% of your account!


The point of this illustration is that you want to setup your risk management rules so that when you do have a drawdown period, you will still have enough capital to stay in the game.

Can you imagine if you lost 85% of your account?!!


You would have to make 566% on what you are left with in order to get back to break even!

"What Do I Have to Do to Get Back to Breakeven?"

Here is a table that will illustrate what percentage you would have to make to break even if you were to lose a certain percentage of your account.

W3Schools

You can see that the more you lose, the harder it is to make it back to your original account size.

This is all the more reason that you should do everything you can to PROTECT your account.

By now, we hope you have gotten it drilled into your head that you should only risk a small percentage of your account per trade so that you can survive your losing streaks and also to avoid a large drawdown in your account.





If you found this useful please share to your friends and help them understand proper risk management

Happy Trading -Krypto Signals Team


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