Ask Colin

Are there times when we have to risk more than 2%?

The detailed  question was:

In various articles you say that we should only risk between 0.5% and 2% of our trading capital. However, charts of some of your previous trades, with stops below the previous low, rarely meant less than 2% risk. Are there times when we have to risk more than 2%?

It is always possible to limit your stop to a certain fraction of the capital with which you have for trading. However, you may not be able to execute such a trade in practice, because it would require you to buy less than one futures contract or less than a sensible minimum number of shares (the brokerage would make it impossible). So you cannot take that trade.

You are correct that you have a better chance of being able to put on a trade if the trade is taken near a breakout. However, that is just another way of saying that the stop is close to the entry price.

The ability to put on a sensible trade depends on how close the stop is to your entry price AND/OR the size of your trading capital. Most people I encounter with the problems you are raising here do not have enough capital. If you have small capital, you are forced to take greater risk and therefore you are more likely to destroy you account sooner rather than later.

With shares there is always a number of shares you could buy and only risk 2% back to your stop, unless your capital was ridiculously small, like $100. However, if you had $10,000 (and that is not enough to trade, so please don't quote me as saying it is) for the sake of the argument, you could always buy some shares, no matter how far away your stop is because 2% of $10,000 is $200 and there are plenty of ASX shares selling below this price, such that you could buy at least one share. It would not be sensible, as I said above, but it is possible.

Keywords: