My stop at 2% of capital is \$2000, which is 66% of the investment. Isn't this too high?

The detailed question was:

Using your article "Learn to Avoid the Destructive Trade", with a trading capital of \$100,00, I calculated that I should buy \$3000 worth of a stock. However, the stop at 2% of capital is \$2000, which is 66% of the investment. Isn't this too high?

Your confusion seems to be that you are calculating the stop-loss from the n% rule for money management. This is putting the thing the wrong way around.

My approach is to base the stop on technical analysis - basically the point where the thesis upon which you bought the stock would be wrong. An example would be below a moving average or trend line, if this is how you were trading. Once you have determined your stop loss level, you then calculate how many shares you can buy if that is the stop-loss.

For example, if you had set the stop at 90c and the current price was \$1.00, the risk is 10c. The number of shares you could buy is \$2000 / .10, or 20,000.

Please note that I regard 2% as right at the outer limits of risk and prefer a lower percentage in my trading. However, with relatively small capital like \$100,000, it is probably OK. However, I would be looking to be closer to 1% whenever possible.

The n% rule will sometimes result in a position size (number of shares you could buy) that is too small to be worthwhile. You simply do not take these trades.

The other thing that seems to be worrying you is the size of the risk compared to the value of each trade. This is looking at it the wrong way. What you should focus on with the money management calculations is the preservation of capital. It is true that the wider the stop, the smaller the position and the greater the risk as a percentage of trade value. However, we are trying to avoid over trading here and the relevant comparison is amount risked, which is always no more than n% of your funds. In that way you avoid taking huge risks on some stocks, which would be the case if you just bought the same value of shares each time.

Keywords: