The 2% rule is a powerful tool in Commodity trading. By adopting this rule youíre using a strategy that decreases the size of your losses during losing streaks, an important consideration.
To avoid a situation where you could end up with excessively large positions that may put your Commodity trading float at risk, you can choose to introduce an extra rule. This rule would limit the dollar value of a position to be no more than a set percentage of your entire Commodity trading float.
For example, you might decide that youíll never open a position that has a dollar value of more than 25% of your entire Commodity trading float. This rule would only be executed if, after calculating the formula that determines how many shares you buy, you find the dollar value of that position would greater than 25% of your float. If this happened, you would scale down the position to make sure it did not exceed that 25%.
The percentage that you decide upon will depend on the type of system youíre trading, the size of your float, and your personal tolerance for risk. Generally, smaller Commodity trading floats might use 25%, and larger Commodity trading floats might use as little as 10% or even 5%. There are no definitive numbers, and the percentage that you choose will depend on your personal circumstances.
Once this tendency is corrected for you will have all your money management rules in place, ready to control your risk in the Commodity market. Now you need to take the next step. Test your system to find out which of the variables best suit you, remembering always that position sizing is the most significant part of any system design. It is the lynchpin of money management. Once youíve tested your system, and fine-tuned your rules, you will be well on your way to becoming a successful Commodity trader.
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