DEFINITION of '2% Rule'

The 2% rule is a money management strategy where an investor risks no more than 2% of available capital on a single trade. To implement the 2% rule, the investor first calculates 2% of their available trading capital; this is referred to as the capital at risk. Brokerage fees for buying and selling shares are factored into the capital at risk to calculate the maximum permissible risk. The maximum permissible risk is then divided by the stop-loss amount to determine the number of shares that can be purchased.


If market conditions change and result in the trader getting stopped out of the trade, the downside exposure is limited as the losing trade represents only 2% of the total amount of trading capital available. Even if a trader has 10 consecutive losses, they only draw their account down by 20%. The 2% rule can be used with other risk management strategies to preserve a trader’s capital. For instance, an investor may stop trading for the month if their account falls below a maximum drawdown percentage.

The 2% rule is a restriction created by investors to stay within the risk management parameters of a trading system. For example, an investor who uses the 2% rule and has a $100,000 trading account, risks no more than $2,000 - or 2% of the value of the account on a particular investment. By knowing what percentage of investment capital may be risked, the investor can work backward to determine the total number of shares to purchase. The investor can also use stop-loss orders to limit downside risk.

Using the 2% Rule with a Stop Loss Order

Suppose that a trader has a $50,000 trading account and wants to trade Apple Inc. The trader can risk $1,000 of capital using the 2% rule ($50,000 x 0.02%). If Apple is trading at $170 and the trader wants to use a $15 stop loss, he or she can buy 67 shares ($1,000 / $15). If there is a $25 round turn commission charge, the trader can buy 65 shares ($975 / $15). In practice, traders must consider slippage costs and gap risk which have the potential to result in losses that are significantly greater than 2%. For instance, if the trader held the Apple position overnight and it opened at $140 the following day after an earnings announcement, it results in a 4% loss ($1,000 / $30).

(For more, see: Do Stop or Limit Orders Protect You Against Gaps in a Stock’s Price?)

  1. Risk Capital

    Risk capital consists of investment funds allocated to speculative ...
  2. Market Risk

    Market risk is the possibility of an investor experiencing losses ...
  3. Filter Rule

    A filter rule is a trading strategy in which technical analysts ...
  4. Trailing Stop

    A trailing stop is a stop order that can be set at a defined ...
  5. Trading Strategy

    A set of objective rules designating the conditions that must ...
  6. Trader

    A trader is an individual who engages in the transfer of financial ...
Related Articles
  1. Trading

    Top 10 Rules For Successful Trading

    Whether you're a novice or an expert, these 10 rules should be the backbone of your trading career.
  2. Trading

    Increase Your Profits With Soft or Mental Stops

    A soft stop provides a trader with added flexibility, allowing him to react to the market.
  3. Trading

    Forex day trading: 5 mistakes to avoid

    Learn more about the five common mistakes that foreign exchange (forex) day traders often make in an attempt to boost returns.
  4. Trading

    Top Reasons Forex Traders Fail

    This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding.
  5. Trading

    The Stop-Loss Order - Make Sure You Use It

    It's a simple but powerful tool to help you implement your stock-investment strategy. Find out how.
  6. Trading

    Risk management techniques for active traders

    Learn how active traders manage risk through the use of stop-loss and take-profit points.
  7. Trading

    10 steps to building a winning trading plan

    It's impossible to avoid disaster without trading rules — make sure you know how to devise them for yourself.
  8. Trading

    A logical method of stop placement

    Explore several approaches to determining stop-order placement in forex trading that will help you swallow your pride and keep your portfolio afloat.
  9. Trading

    Understanding Forex Risk Management

    There's risk in every trade you take, but as long as you can measure risk, you can manage it.
  1. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
  2. What is the difference between the rule of 70 and the rule of 72?

    Find out more about the rule of 70 and the rule of 72, what the two rules measure and the main difference between them. Read Answer >>
  3. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center