2% Max Loss
Updated
Money Man has not seen the need to adjust his levels as he still stands with his original idea that ETH needs to break a pattern, clear as day on the chart, to get buyers over the fatigue. The short term trendlines are telling us this and has proven themselves as guiding pattern formation. Logic thus would change the top of Decision 1 and bottom of Decision 2 to keep these lines inside it as we go.
So, he is taking this time to expand more on his ideas around risk. We all have heard about the Kelly Criterion, but also about the 2% rule (cap your losses at 2% of total allocation – the total you have allocated to trade in a particular instrument like ETH).
He would classify the Kelly Criterion as an advanced risk management tool, hard to pin down within so much variance that a market has. Advanced, you say? Then that must be what a new trader should use! Not so fast. New and even older hands typically calculate their acceptable risk before admitting defeat on a trade, via back testing. Here lies the rub as more important than; the “past results do not guarantee future results” understanding – there is the lack of experience in relation to their own emotional tolerance to red. You know: the old “close winners fast and let loser run” outcome.
Money Man has written about the well-known break-even parabolic horizon a long time ago and link that below. He mused then that that parabola is what sinks even brick and mortar businesses. Now he wants to give his thoughts on the 2% (used in this explanation – but could be more or less) risk to total allocation. There is another parabola hidden here (in red) and finding your sweet spot is the goal. So, your sweet spot would depend on your tolerance to loss (percentage) and its relationship to the chart / price action (distance on chart in percentage).
Many traders simply trade with their whole allocation and thus sit at the far left grey bar (100% of allocation in) and far left of the parabola, forced into a 2% below entry price stop loss placement. The other extreme is a trader who only uses 2% of their allocation on any trade to trade with and have no need for a stop loss if they believe in the 2% rule. There is the option to adhere to the 2% rule and adjust your position size according to where you would like to put your stop loss. The graph above tries to give a quick reference rule of thumb and illustrates how the distance of your stop loss parabolically grows the smaller your position size. Back of an envelope math but soothing to the adrenal glands if you can find your own sweet spot.
Where does the whole 2% rule come from? Money Man does not know for sure but knows that it has been around for a long time and has thus been discussed and “peer reviewed” extensively. Also, and more importantly, it speaks to another reality in the antifragility of staking your options in your favour while keeping your risks in check – an advantage you can still reap even if the percentage is too low for your liking. The reason for including it is that it could be a bridge between “betting 100% on every trade” and having a very well-developed dynamic trade size to stop loss placement distance dependent on market conditions.
Please double check the math that went into the above graph before use. Remember there are no guarantees, only probabilities. Very Important to me: Please like if you appreciate the effort, Please comment and develop this further and Please follow if you see this analysis thread going somewhere you would like to know about.
So, he is taking this time to expand more on his ideas around risk. We all have heard about the Kelly Criterion, but also about the 2% rule (cap your losses at 2% of total allocation – the total you have allocated to trade in a particular instrument like ETH).
He would classify the Kelly Criterion as an advanced risk management tool, hard to pin down within so much variance that a market has. Advanced, you say? Then that must be what a new trader should use! Not so fast. New and even older hands typically calculate their acceptable risk before admitting defeat on a trade, via back testing. Here lies the rub as more important than; the “past results do not guarantee future results” understanding – there is the lack of experience in relation to their own emotional tolerance to red. You know: the old “close winners fast and let loser run” outcome.
Money Man has written about the well-known break-even parabolic horizon a long time ago and link that below. He mused then that that parabola is what sinks even brick and mortar businesses. Now he wants to give his thoughts on the 2% (used in this explanation – but could be more or less) risk to total allocation. There is another parabola hidden here (in red) and finding your sweet spot is the goal. So, your sweet spot would depend on your tolerance to loss (percentage) and its relationship to the chart / price action (distance on chart in percentage).
Many traders simply trade with their whole allocation and thus sit at the far left grey bar (100% of allocation in) and far left of the parabola, forced into a 2% below entry price stop loss placement. The other extreme is a trader who only uses 2% of their allocation on any trade to trade with and have no need for a stop loss if they believe in the 2% rule. There is the option to adhere to the 2% rule and adjust your position size according to where you would like to put your stop loss. The graph above tries to give a quick reference rule of thumb and illustrates how the distance of your stop loss parabolically grows the smaller your position size. Back of an envelope math but soothing to the adrenal glands if you can find your own sweet spot.
Where does the whole 2% rule come from? Money Man does not know for sure but knows that it has been around for a long time and has thus been discussed and “peer reviewed” extensively. Also, and more importantly, it speaks to another reality in the antifragility of staking your options in your favour while keeping your risks in check – an advantage you can still reap even if the percentage is too low for your liking. The reason for including it is that it could be a bridge between “betting 100% on every trade” and having a very well-developed dynamic trade size to stop loss placement distance dependent on market conditions.
Please double check the math that went into the above graph before use. Remember there are no guarantees, only probabilities. Very Important to me: Please like if you appreciate the effort, Please comment and develop this further and Please follow if you see this analysis thread going somewhere you would like to know about.
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Parabolic Break Even Horizon 
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