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Let’s take a look at how controlling risk with the 2% Rule works vs. an even tighter 1% Rule. Table 3 shows what your account would look like after a five-in-a-row losing streak—something an active trader could experience in a single day. Note how the fixed percentage rule reduces the size of each succeeding trade, which slows your account’s decay when you experience a losing streak.
| 2% Rule vs. 1% Rule in a Five-Trade Losing Streak (dollars, exclusive of commissions) | ||||
|---|---|---|---|---|
| Starting Amount | 2% at Risk | Ending Amount | 1% at Risk | Ending Amount |
| $50,000 | $1,000 | $49,000 | $500 | $49,500 |
| $49,000 / $49,500 | $980 | $48,020 | $495 | $49,005 |
| $48,020 / $49,005 | $960 | $47,060 | $490 | $48,515 |
| $47,060 / $48,515 | $940 | $46,120 | $485 | $48,030 |
| $46,120 / $48,030 | $922 | $45,198 | $480 | $47,550 |
Making Up for Trading Losses
Account losses are inevitable when you are trading futures. And, when you encounter a losing streak, you have to build back your earnings to get back where you were when you started. Mathematically, the amount you have to gain will be larger than the amount you lost. Table 4 shows in percentage terms the gain you must recover to make up for a similar loss.
| Making Up for Trading Losses (percent) | |
|---|---|
| Loss | Recovery Gain |
| 10 | 11.11 |
| 20 | 25 |
| 30 | 42.85 |
| 40 | 66.66 |
| 50 | 100 |
| 60 | 150 |
| 70 | 233 |
| 80 | 400 |
| 90 | 900 |
| 100 | Broke! |
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Regards,
Peter Knight Advisor
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