“Never Risk More Than
2% of your capital on any one stock”
A very good tool that is used by successful traders and
investors to limit their capital’s exposure to risk is the system called “The
2% Rule”.
The 2% Rule is a strategy where the investor limits his
risks in case of a loss of no more than 2% of his total capital during a single
trade.
To adopt this system, first calculate the 2% value of your available
trading capital. Once this is known, we can play around this value to formulate
our system based on the concept of “The 2% Rule”.
If your available trading capital is P50, 000, never risk
more than 2% of P50,000. Your maximum risk per trade is P1,000.00. This amount must
include the commissions and charges during the trade.
Using the 2% Rule, we can now put a safety limit which we can call the Stop – Loss Point
on our trading to protect our investment from downside risk;
For illustrative purposes, let’s compute the S/L (Stop-Loss)
Point using the 2% Rule given the example below.
EXAMPLE:
You have bought 2,000 shares of ABC stocks at P5.00 per share. Your
capital cost is equal to 2,000 shares x P5.00 per share = P10,000.00.
Applying the 2% Rule, your Allowable Loss should not be more than P1,000.00
based on your available trading capital of P50,000.
To establish
your S/L (Stop-Loss) point, let’s compute the following:
Assume Total
Brokerage Charges = P102.30
S/L Point = Capital Cost – (Allowable Loss – Total
Commission charges)/ Total Shares bought
S/L Point = P10,000
– (P1000 – P102.30) / 2000
S/L Point =
P4.55 per share