September 29, 2022

The 2% Rule

The 2% Rule


We’ve all heard Buffet’s famous quote, “The stock market is a mechanism for transferring money from the impatient to the patient.” The same holds true in any market, including Crypto. I’ve always thought of trading the markets like fishing, which requires an immense amount of patience if you want to bring home a fish to fry. If you’ve never gone fishing before then let me enlighten you on the fisherman tales.

A fisherman never brags about catching a fish that is barely over the size limit. They don’t hold up those small fish and take photos with them either. They don’t tell you how they hooked it or how long it took to reel-in. The reason is pretty obvious, it would be kind of strange to show off your small fish. But why?

A small fish serves the same purpose as a big fish and provides dinner for yourself and others. It’s much easier to catch smaller fish and your family will survive a lot longer on smaller fishes than they ever will on the big fish that are brought in. That is simply because big fish are harder to catch, deeper into the waters and for an amateur extremely unlikely to reel-in.

If you’ve ever had the pleasure of going on a deep sea fishing adventure then you know how hard it is to catch the big ones. However, when you’re shopping for your boat captain they always talk about the big ones that were captured just a trip or two before.

Now, take everything that I just said and apply it to trading. Look around your trading sphere, whether that is social media, brokers or even people in your life that trade. Ask yourself, how often do you hear about the small wins? How many times do you see someone post a screenshot of their trading account with a trade that is up 50%-100% and even upwards to 1,000% in crypto?

Traders who boast these big wins often do so for attention, whether they realize it or not. They want the other fishermen to know they just reeled in a biggie. The problem is when they slice and dice that biggie up, that meat only lasts so long in the right hands and in the wrong hands most of it gets spoiled. The same goes for the trader. Most of those big wins you see are often lost chasing equally bigger wins.

Millionaire Mindset

Before I get into the 2% rule I want to share one more analogy. If you have never read, The Millionaire Next Door by Thomas J. Stanley and William Danko then I highly recommend it. The whole purpose of the book is to point out that you don’t become a millionaire by buying expensive toys and showboating to keep up with the Jones’. A true millionaire is frugal and they only buy what they need and occasionally splurge on some wants here and there.

The most successful traders become what they are because they are consistent. You don’t see Charlie Munger driving around in a Lamborghini live tweeting his 100% gains. There is a reason for this. When looking for other traders to follow, it is important to keep this thought in the back of your mind.

I tell you this not to discourage you from being able to be a successful trader. I want you to understand that this is very rare and unless you’re lucky as hell you should never be reaching 1,000% level of gains as a trader. If you do, then you’re gambling my friend. Now, the exception to the rule is investing. There is a major difference between investing and trading. As an investor you may hold assets for life. During this 20-30 year period you likely will see 1,000% increases and that is acceptable. However, when trading your goal should be to get in and out of positions with profit in the shortest amount of time as possible and then compound. So let’s dive in:


One of the three pillars to successful trading, discipline is the backbone of the 2% rule. If you do not have discipline you won’t succeed at trading the markets. I can’t say that enough. Practice it on every trade.

The 2% rule is simple and very effective. It helps you take profits and move on to your next trade without getting caught in the emotional rollercoaster that a trading asset often brings with it. Yes, I know that this might not seem like a lot to some of you. However, compounding that 2% week over week is going to do some serious David Blane magic. If you’re trading with just a hundred dollars then making two bucks on every trade isn’t going to seem like a real win. However, making 2% on twenty grand is going to feel great. Perspective means a lot. As a trader you should always think in percentages instead of dollar figures.

Our target is 2% because in quick reversals that is usually how much an asset tends to retract. Of course that isn’t firm and sometimes you’ll get burned and other times you’ll watch the price reach out into the stratosphere. But again, we don’t care about those situations. We’re looking for averages because averages are where the real money is made. We want to catch the hype and ride the wave before our golden apple turns into a poisonous one. There’s always a point in every bullish period where buyers become sellers. The goal is to avoid being other sellers' liquidity and as a successful trader we never want to find ourselves in these murky waters. We want to be three trades down the road when that happens.

I could talk about this strategy for days but the best way to show the effectiveness is with data. Before I get into that though I want to provide a little bit of background. I typically trade with a brokerage account within my 401k. It’s a cash account which means if necessary I can day trade it as long as I still have cash to buy with. My account was once nothing. When I first started I just wanted to learn the basics of trading and while I got extremely lucky I also found myself with some pretty big losses. Needless to say, once I became disciplined I was able to strategically use the 2% rule to consistently lock in profits and overtime my account went from $2,000.00 to $20,000.00 to where it is today. Sorry, I won’t be humble bragging about the net worth of that account. I tend to keep my weekly trading account at $20,000.00. Everything I profit beyond this is transferred back into the 401k into an index fund for longer term safe investments.

I typically make 4-5 trades a week and spend my entire balance across those trades. Meaning, I am spending at least $20,000 per trade. Again, the key is consistency and discipline. This can be risky and defeats the purpose of the age old wisdom of not putting all of your eggs into one basket. One thing to keep in mind though is that this is just one egg in my big basket of investments. This is my short term trading egg and if I lose it all…well while that would suck I would still have the rest of my diversified portfolio working for me.


So, let’s break down some data with an account that is $5,000.00 with 5 trades a week for 1 month and show just how the 2% rule can be effective. For this scenario, I just want to show how 2% can compound so we are going with a best case scenario and I’ll explain more after:

Week One:

Trade 1: $5,000 buy in. Profit: $100.00

Trade 2: $5,100 buy in. Profit: $102.00

Trade 3: $5,202 buy in. Profit: $104.00

Trade 4: $5,306 buy in. Profit: $106.00

Trade 5: $5,412 buy in. Profit: $108.00

End of first week: $5,520. Profit for week: $520

Week Two:

Trade 1: $5,520 buy in. Profit: $110.00

Trade 2: $5,630 buy in. Profit: $112.00

Trade 3: $5,742 buy in. Profit: $114.00

Trade 4: $5,856 buy in. Profit: $116.00

Trade 5: $5,973 buy in. Profit: $117.00

End of second week: $6,092. Profit for week: $572

Week Three:

Trade 1: $6,092 buy in. Profit: $121

Trade 2: $6,213 buy in. Profit: $125

Trade 3: $6,338 buy in. Profit: $126

Trade 4: $6,464 buy in. Profit: $130

Trade 5: $6,594 buy in. Profit: $132

End of third week: $6,726. Profit for week: $634

Week Four:

Trade 1: $6,726 buy in. Profit: $134

Trade 2: $6,860 buy in. Profit: $137

Trade 3: $6,997 buy in. Profit: $139

Trade 4: $7,136 buy in. Profit: $142

Trade 5: $7,278 buy in. Profit: $145

End of fourth week: $7,423. Profit for week: $697

Profit for the month: $2,423 which is +48% from our initial balance.

I know what you’re thinking, “What about the losses?” and you’re not wrong. You will definitely experience losses but by taking such a tight profit your wins are going to outweigh those losses. I’m not here to convince you of anything. I have been trading this way for quite some time and honestly, I have never had a month where I didn’t end up in profit. This applies to all markets.

The point of the example is not to set unrealistic expectations but more to show that compounding 2% really does add up. I personally learned this from my trading mentor many many moons ago. When he first showed me how to trade he asked me, “What is it that you want to accomplish?” and my answer to him was, “Financial freedom.” That is the end goal but there are a lot of baby steps along the way.

So I ask you dear reader, what is it that you want to accomplish? If you’re like me then the end goal is financial freedom. Your baby steps should be to pay for one of your bills per month. Eliminating just a single bill from your household budget can loosen the restraints a bit. The first bill I eliminated when I started trading in my personal account was my car payment. It was $258 a month at the time. I set a goal to earn that every month and if I did then it was a success. When I realized that consistently taking profits at 2% month over month earned me far more than that I was able to add a second bill into the mix.

A lot of people are going to see the example I gave and immediately think I’m blowing smoke up their ass. Do you know how many times I have been told that it’s not possible? It’s a running joke at this point. It is most definitely possible to earn a living as a day-trader. The most successful day-traders I know take many losses, including myself. Again, those losses may seem big in the moment but in the end when your wins outweigh those losses that’s all that matters. You just have to remember:

-Be consistent & have patience

-Remove all ideas of moonshots and insane gains

-Leave emotions at the door(I’ll save this for another article)


The key takeaway from this article is that 2% adds up. Stop chasing incredible gains. Those are shooting stars and while there are multiple shooting stars every night it's hard to predict where they’ll be and they move too fast to catch the profit. Instead focus on the stars. They are spread out all over the market and can be found every single day.

The 2% rule works. Delete the “Get Rich Quick” mentality from your mindset and with patience, discipline and time you’ll see the growth in your account.

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