2% Rule

AAA

DEFINITION of '2% Rule'

A trading practice where an investor should concentrate no more than 2% of available capital on a single trade. To follow the 2% rule an investor first calculates 2% of the available trading capital, called the capital at risk. Brokerage fees for buying and selling shares are then factored into the capital at risk, and this figure is divided by the current share price. The resulting figure is the total amount of shares that can be purchased. If market conditions change and result in the trader losing the total value of that trade the downside exposure is only 2%, since the value of the original trade was limited to 2% of the total amount of trading capital available.

INVESTOPEDIA EXPLAINS '2% Rule'

The 2% rule is a restriction created by investors in order to stay within the boundaries of a trading system. For example, an investor with $100,000 will purchase no more than $2,000 - or 2% of the value of the account - of a particular investment. By knowing the upper limit that can be risked, the investor can work backwards to determine the total number of shares that can be purchased. The investor can also use stop-loss orders to limit downside risk.

RELATED TERMS
  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches ...
  2. Trading Plan

    A systematic method for screening and evaluating stocks, determining ...
  3. Commission

    A service charge assessed by a broker or investment advisor in ...
  4. Discount Broker

    A stockbroker who carries out buy and sell orders at a reduced ...
  5. Brokerage Fee

    A fee charged by an agent, or agent's company to facilitate transactions ...
  6. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
Related Articles
  1. Trailing-Stop Techniques
    Active Trading Fundamentals

    Trailing-Stop Techniques

  2. Day Trading Strategies For Beginners
    Trading Strategies

    Day Trading Strategies For Beginners

  3. The Art Of Selling A Losing Position
    Investing

    The Art Of Selling A Losing Position

  4. Having A Plan: The Basis Of Success
    Options & Futures

    Having A Plan: The Basis Of Success

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center