Skip to main content

The 2% Rule - Simple Math That Protects Your Capital

· 7 min read
Karthik
Karthik
Founder, TradeLyser

One rule. One number. One decision.

2%

That's all you need to know to protect your trading account.

Let me show you why this simple rule is the difference between survival and destruction.

What Is the 2% Rule?​

The 2% Rule: Never risk more than 2% of your account on a single trade.

That's it.

Not 3%. Not 5%. Not 10%.

2%.

The Math​

Account: ₹5,00,000
2% Risk: ₹10,000 per trade
Stop Loss: ₹50 away
Position Size: ₹10,000 ÷ ₹50 = 200 shares

If stopped out: Lose exactly ₹10,000 (2%)
Account remaining: ₹4,90,000 (98%)

Why 2%? Why Not More?​

The Survival Math​

Let's see what happens with different risk levels:

Scenario: 10-Loss Streak (happens to everyone)​

At 2% risk per trade:

  • Loss 1: ₹5,00,000 → ₹4,90,000 (-2%)
  • Loss 2: ₹4,90,000 → ₹4,80,200 (-2%)
  • Loss 3: ₹4,80,200 → ₹4,70,596 (-2%)
  • ...
  • Loss 10: ₹4,08,000 → ₹3,99,840 (-2%)
  • Total loss: 20%
  • Account survives

At 5% risk per trade:

  • Loss 1: ₹5,00,000 → ₹4,75,000 (-5%)
  • Loss 2: ₹4,75,000 → ₹4,51,250 (-5%)
  • Loss 3: ₹4,51,250 → ₹4,28,688 (-5%)
  • ...
  • Loss 10: ₹2,99,000 → ₹2,84,000 (-5%)
  • Total loss: 43%
  • Account damaged

At 10% risk per trade:

  • Loss 1: ₹5,00,000 → ₹4,50,000 (-10%)
  • Loss 2: ₹4,50,000 → ₹4,05,000 (-10%)
  • Loss 3: ₹4,05,000 → ₹3,64,500 (-10%)
  • ...
  • Loss 10: ₹1,95,000 → ₹1,75,000 (-10%)
  • Total loss: 65%
  • Account devastated

The Recovery Math​

How much do you need to recover?

After 20% loss (2% rule):

  • Need +25% to recover
  • Achievable with good trading

After 43% loss (5% rule):

  • Need +75% to recover
  • Very difficult

After 65% loss (10% rule):

  • Need +186% to recover
  • Nearly impossible

The 2% rule keeps you in the game.

Real Examples​

Example 1: Equity Trading​

Setup:

  • Account: ₹3,00,000
  • Stock: RELIANCE
  • Entry: ₹2,500
  • Stop: ₹2,450 (₹50 away)

2% Calculation:

  • Risk amount: ₹3,00,000 × 2% = ₹6,000
  • Position size: ₹6,000 ÷ ₹50 = 120 shares
  • Investment: 120 × ₹2,500 = ₹3,00,000
  • Risk: 120 × ₹50 = ₹6,000 ✓

If stopped out: Lose ₹6,000 (exactly 2%)

Example 2: Options Trading​

Setup:

  • Account: ₹5,00,000
  • NIFTY 24500 CE @ ₹150
  • Stop: ₹120 (₹30 away)
  • Lot size: 50

2% Calculation:

  • Risk amount: ₹5,00,000 × 2% = ₹10,000
  • Position size: ₹10,000 ÷ (₹30 × 50) = 6.67 lots
  • Round down: 6 lots
  • Investment: 6 × 50 × ₹150 = ₹45,000
  • Risk: 6 × 50 × ₹30 = ₹9,000 ✓

If stopped out: Lose ₹9,000 (1.8% - even safer)

Example 3: Futures Trading​

Setup:

  • Account: ₹10,00,000
  • NIFTY Futures @ 24,500
  • Stop: 24,400 (100 points)
  • Lot size: 50

2% Calculation:

  • Risk amount: ₹10,00,000 × 2% = ₹20,000
  • Position size: ₹20,000 ÷ (100 × 50) = 4 lots
  • Investment: 4 × 50 × 24,500 = ₹49,00,000
  • Margin required: ~₹2,45,000
  • Risk: 4 × 50 × 100 = ₹20,000 ✓

If stopped out: Lose ₹20,000 (exactly 2%)

Common Objections to the 2% Rule​

Objection #1: "2% Is Too Small"​

"I need bigger positions to make money"

Reality check:

  • 2% × 20 trades = 40% of account at risk
  • If you win 60% of trades, you're profitable
  • Compounding works over time

Example:

  • Start: ₹5,00,000
  • Win 60% of trades (2% each)
  • After 100 trades: ₹8,50,000
  • 70% growth with 2% risk

Objection #2: "I'm Confident This Will Work"​

"This trade is 100% sure"

Reality:

  • No trade is 100% sure
  • Even 80% probability trades lose 20% of time
  • Confidence ≠ accuracy

Better approach:

  • Trade with 2% risk
  • If you're right, you make money
  • If you're wrong, you survive

Objection #3: "I Need to Make Money Fast"​

"I can't wait for slow growth"

Reality:

  • Fast money = Fast losses
  • Slow money = Sustainable money
  • Surviving > Thriving

Math:

  • 2% risk: Survive losing streaks
  • 10% risk: Blow up account
  • Dead traders make 0%

Objection #4: "My Account Is Too Small"​

"₹50,000 account, 2% = ₹1,000, too small"

Solutions:

  1. Build account first (paper trade)
  2. Use 2% of larger amount (₹1,00,000 = ₹2,000)
  3. Accept smaller positions (better than blowing up)

Remember: Small account + big risk = No account

Advanced: When to Use Less Than 2%​

Use 1% When:​

High volatility markets:

  • VIX > 20
  • Earnings season
  • Major news events

Testing new strategies:

  • First 20 trades
  • Unfamiliar instruments
  • Different timeframes

After losses:

  • Recent losing streak
  • Emotional state compromised
  • Account drawdown > 10%

Use 0.5% When:​

Account < ₹1,00,000:

  • Preserve capital
  • Learn without risk
  • Build confidence

Very volatile instruments:

  • Penny stocks
  • Cryptocurrency
  • High-beta stocks

The 2% Rule in Practice​

Daily Implementation​

Before every trade:

  1. Calculate 2% of account
  2. Determine stop loss distance
  3. Calculate position size
  4. Verify: Risk ≤ 2%
  5. Enter trade

Example checklist:

Account: ₹5,00,000
2% Risk: ₹10,000
Entry: ₹1,000
Stop: ₹980 (₹20 away)
Position Size: ₹10,000 ÷ ₹20 = 500 shares
Investment: 500 × ₹1,000 = ₹5,00,000
Risk: 500 × ₹20 = ₹10,000 ✓

Weekly Review​

Check:

  • Did I follow 2% rule every trade?
  • What was my average risk per trade?
  • Any trades exceeded 2%?

If yes: Why? How to prevent?

Monthly Analysis​

Track:

  • Total risk taken
  • Number of 2%+ trades
  • Correlation with losses

Goal: 100% adherence to 2% rule

Portfolio Heat: Multiple Positions​

The Problem​

You have 3 open positions:

  • Position 1: 2% risk
  • Position 2: 2% risk
  • Position 3: 2% risk
  • Total portfolio heat: 6%

This is acceptable.

The Danger Zone​

You have 5 open positions:

  • Each: 2% risk
  • Total portfolio heat: 10%

This is dangerous.

Safe Portfolio Heat Levels​

Total HeatAssessmentAction
0-4%Very safeContinue
4-6%ModerateMonitor
6-8%HighReduce new positions
8-10%Very highStop new trades
10%+Danger zoneClose positions

Rule: Keep total portfolio heat below 6-8%

The 2% Rule Calculator​

Formula​

Position Size = (Account Size × 2%) ÷ Stop Loss Distance

Example:
Account: ₹5,00,000
2% Risk: ₹10,000
Stop Distance: ₹50
Position Size: ₹10,000 ÷ ₹50 = 200 shares

TradeLyser Integration​

Auto-calculation:

  1. Enter account size
  2. Enter entry price
  3. Enter stop price
  4. TradeLyser calculates position size
  5. Shows risk percentage
  6. Alerts if > 2%

No math required. No errors possible.

Real Results: Before & After​

Trader A: No Risk Management​

Before 2% rule:

  • Risk per trade: 5-10%
  • Account: ₹5,00,000
  • After 5 losses: ₹2,50,000 (-50%)
  • Emotional state: Devastated
  • Trading: Stopped

Trader B: With 2% Rule​

After implementing 2% rule:

  • Risk per trade: 2%
  • Account: ₹5,00,000
  • After 5 losses: ₹4,50,000 (-10%)
  • Emotional state: Calm
  • Trading: Continued

Same strategy. Different risk management. Different outcome.

The Psychology of 2%​

Why It Works​

Small losses:

  • Don't hurt emotionally
  • Don't affect confidence
  • Don't trigger revenge trading
  • Allow continued trading

Large losses:

  • Devastate emotionally
  • Destroy confidence
  • Trigger revenge trading
  • Stop trading

The Compound Effect​

Month 1: Follow 2% rule
Month 2: Still following (habit formed)
Month 3: Automatic (no thinking required)
Month 6: Different trader (disciplined)
Month 12: Profitable trader (survived to learn)

Common Mistakes​

Mistake #1: "Just This Once"​

"This trade is special, I'll risk 5%"

Problem: Once becomes always

Solution: Never exceed 2%. Ever.

Mistake #2: Moving Stops​

"I'll widen the stop to 3% risk"

Problem: Defeats the purpose

Solution: Set stop first, then calculate position

Mistake #3: Averaging Down​

"I'll add to losing position"

Problem: Increases risk beyond 2%

Solution: One position per trade

Mistake #4: No Stop Loss​

"I'll hold until it comes back"

Problem: Risk becomes unlimited

Solution: Always set stop before entry

The Bottom Line​

The 2% rule isn't about making money.

It's about staying alive.

You can't make money if you're not trading.

You can't trade if you blow up your account.

The 2% rule ensures you survive to trade another day.

Simple. Powerful. Essential.

Take Action Now​

Today:

  1. Calculate 2% of your account
  2. Write it down where you trade
  3. Use it for your next trade

This Week:

  1. Follow 2% rule for every trade
  2. Track adherence (should be 100%)
  3. Notice how losses feel smaller

This Month:

  1. Review: Did I follow 2% rule?
  2. Calculate: Money saved by small losses
  3. Compare: Before vs after emotional state

👉 Use TradeLyser Position Size Calculator
👉 Download: 2% Rule Calculator
👉 Next: Breakout Trading in Indian Markets

Do you follow the 2% rule? What's your biggest risk management challenge? Share below.