【The Trading Edition】 Episode 25: Protect Yourself from a Bite by a Shark? The Magic of the Pro's "2% Rule" Thoroughly Applied
Last time (the 24th session), we talked about how the human instinct to intensely hate losses can ironically lead to ruin in trading. To survive in the market, it is essential to detach this emotion and adopt a professional stance of accepting losses as “business expenses.”
However, even if you understand in your head to “accept them as expenses,” without concrete criteria, emotions can run wild when it matters most.
So this time, we will share the concrete defensive measures that professionals always practice. One of the two major rules of fund management proposed by Dr. Elder: the “2% Rule.” Once you know this rule, you no longer need to fear the stormy market blindly.
1. The Sharks and Piranhas Lurking in the Market
Dr. Elder compares the dangers that threaten a trader’s account to two sea creatures.
Shark bite:A single, huge loss that delivers a fatal blow to the account in one strike. It occurs when you take on too large a position without proper money management.
School of piranhas:Each individual loss may be small, but a string of consecutive losses gradually gnaws away at the account.
First, we must prevent the “shark bite” that drags us into the sea in one strike. The absolute shield for this is the “2% Rule.”
2. The Shield to Prevent Sharks: What is the “2% Rule”?
The definition of this rule is extremely simple.