The 2% Rule for Forex Strategy

[fortyfiveking]

Hello All,

Just signed up to today and need to pick your brains on the 2% rule.
I have a trading stategy (on 25 pairs back tested over 3 years) that does not have a fixed stop, with positions being closed by indicators. Because of this my loosing trades are diffent amounts.
My questions is, sticking to the 2% rule, what should my 2% risk be per trade.
1: The largest loosing trade (for all 25 pairs over 3 years of backtests.(
2: The average of the largest losing trade
3: The average loosing trade
4: The Largest consecutive draw down
5: The average of the largest consecutive draw down.

Hope this makes sense.

Cheers

 

[TheBramble]

Without a fixed stop on entry you can’t limit your losses to 2% or any percentage for that matter nor can you assign a position size appropriate to the initial risk, as you don’t know what the initial risk is. Which is crazy all by itself.

That you’re trying to backfit and shoe-horn in a post hoc fixed percentage rule on a system that didn’t have one, is a complete nonsense.

Either stick with your no fixed stop system (for as long as you’re able…LOL) or develop it around a fixed percentage risk per trade. You still get to exit on your indicators, but you’ll have the advantage of a known and fixed risk and appropriate position sizing.

 

[Pazienza]

Put your stop where you no longer want to be in the trade. Position size each trade based on that.

 

[DashRiprock]

i dont think its stupid idea really, i know people what done technical strategies always with indicator (or whatever) based rules on entry AND exit - its not non-heard of.

what i would do (but am never going 2 trade like that so take with salt), is like look at all your losses and do it that way. Like "average" loss set to 2% is a bit too simple I think, like include vol in there at least, but take all ur val adjusted losses and make sample and analysis on that. like re arrange them and re do backtest, and stuff like that until find sumthing workingable.

One thing though is to be careful of getting caught limit up or down.

 

[Jason101]

Don’t listen to them. I like your dynamic initial stop idea. It is not a common thing.
I think a lot of top traders think outside of the box.
Besides most people would not think twice about using a dynamic trailing stop, so why not the initial stop?

A Word of caution though I would have a worst case scenario disaster hard stop in place just in case of a gap or war break out or earthquake (especially if you are using lagging indicators) or a computer/internet/power cut situation.

To your question, I think your percentage profit and not just your loses should be looked at.

I.e. how many times you win, the average amount you win. Verses how often you lose and the average amount you lose. Then make sure your average winnings can pay for a run of losers before the run of losers occur. Unless I am missing something here you should be able to average this into roughly 2% risk, give or take a bit.

Good luck, let me know how you get on.

Jason

 

[TheBramble]

I can’t separate the p!ss-takers from the deluded here. Perhaps I’m one of the deluded.

I thought OP had run a no-stop system in backtest over 3 years using inds for entry and exit. Not my cup of tea, but it’s a big world out there…

He then wanted to layer in post hoc a 2% max risk per trade ’rule’ (which didn’t exist during the backtest) to ‘show’ how his losers never took more than 2% of his cap.

If I’ve misunderstood and he wants now to adjust his system to limit his position size with a 2% risk per trade then he’ll have to use an additional bit of work to determine how to do that.

But he can’t backfit a 2% rule to the existing backtest data.

 

[LazyManForex]

I've been in your shoes. I've always based it on worst historic drawdown then double it for safety.

In addition though, I trade a significant number of strategies simultaneously so my account risk is even more distributed. Plus I have a significant number of strategies that have fixed risk. But even in those cases its based on double Max historic draw down.

Yet I have had instances of strategies go to crap and take out even double Max historic.

So if it were my account, I would divide it into 10 parts. Decide on a mm methodology and begin trading. Now look for nine more.

Cheers and good luck!

 

[fortyfiveking]

Thanks for all your Ideas and thoughts. I have backtested the Strategy (system) last night with a fixed stop for all pairs. Using a 300 pip fixed stop, the system performance was not affected (as the fixed stop was very rarely hit) and will allow me to calculate the lot size for each entry. It will also give me fixed figures I can use to compound my fund without risking more than 2% of the fund. The strategy (System) I am using works with fixed parameters, so adding a stop (within the trading range) or other indicators was not an option. I simply wanted to calcualte my risk for money management purposes. I would still like to hear from anyone who does not use a fixed stop on entry, but uses something like fractals to exit the position and ask them how they work out there risk per trade. Cheers

 

[TheBramble]

Having a fixed stop on entry (even a rarely hit absolute one such as 300 pips) is the only way you're ever going to be able to manage your risk at whatever level you want to manage it to.

But you say you’re only going to use that 300 pip sto’ for theoretical purposes to calculate your position sizes. If you don’t actually USE that stop (however constructed) you aren’t managing your risk. A rarely hit 300 pip theoretical stop will not protect your capital from a real life 600 pip contra move.

 

[fortyfiveking]

It will not be a theoretical stop I have applied it to all order entries. It will aslo give me peace of mind, as mentioned, which always helps. Its tough out there

 

[Mata Nui]

I use a couple of indicators for entry but always exit when a particular indicator changes. I do use an initial stop of the nearest swing high or low and that is what i use to calculate my risk. I always get an exit signal from the indicator before i hit this though (Unless its one of those enter then reverse rapidly to stop things).

I would think its probably more sensible to look at the charts and pick a technical point for your stop (like a swing high/low or an obvious SR level) than a random value in points. If you have been using the system for a while you probably know where your indicators would give you the exit signal anyway

 

[fortyfiveking]

The systems will close the position automatically, I think if I started to use my discrection to choose a stop for each trade it could go horrible wrong lol. I like the fact that I can place my orders (indicated by the system)at the start of the daily bar and just let the system do the rest. I seem to make less mistakes that way I will look at applying a new stop stategy at the weekend and see if the 300 pips can be reduced in any way. Cheers

 

[fortyfiveking]

Following on from the ealier discussion. Does the 2% rule apply to multiple positions?
For exmple.If I calculate that my risk for a single trade is 2lots with a 300pip stop, would the same apply for the 2nd and 3rd trade(the 2nd 3rd positions were also calcuated at 1lot with a 300pip stop) if the positions were all trading at the same time? Or would you have to calcuate the 2nd positions risk based on the 1st postion taken. Cheers

 

[AlexanderCollins]

The largest loosing trade.

Follow your own strategy and get ready to the worst case - this is your 2% risk per trade. Worst case.

My 2 cents.

Alex

 

[ProfessorK]

IMO 2% is ENORMOUS!!!!
I wouldn't risk anymore than 0.5% of my trading account per maximum acceptable loss.

 

[fortyfiveking]

Follow your own strategy and get ready to the worst case - this is your 2% risk per trade. Worst case.

My 2 cents.

Alex

Cheers Alex,

I've been sticking to the stategy which seems to be working well, 2.5% profit for the first 3 weeks, but its very early days. Ready for the worst case

 

[fortyfiveking]

IMO 2% is ENORMOUS!!!!
I wouldn't risk anymore than 0.5% of my trading account per maximum acceptable loss.

I'd love to only risk .5 % but that would mean I would need quadruple my fund to run the system at this stage. I'd never get it pass the mrs :whistling