Hi TFG, there is probably no formula that will be right. Which is why I question the 2% of equity figure. I think that you have to have an idea of probability of being right (win/loss rate) to be able to scale your trades and size. And this may vary with trades. Say you have a risk/reward of at least 1:5, you figure the probability of payoff is 90%, what % of your equity would you put on the trade ? I would say this is worth a much bigger position size than say something where the win rate is 50%. It happens irregularly but this is where 95% of my profit has come from. The rest of the time I shouldn't trade. Occasionally (but not that rarely, it about every 3 months but feels longer) something comes along that is very high probability and high reward based on what you know (technically, fundamentally, sentiment based), like Euro QE or the post SNB floor removal and you can ride that and add to the position on the way. You can easily triple your equity with even 1:20 leverage in such a move without pyramiding the position. Things like that I still kick myself about why I didn't have a larger position when I knew I should have and instead worry and waste time about 2% trades at 0.5 probabilities, which are much worse EV wise and actually more risk although they are smaller position size. It is a delusion that 20 x 2% trades are better than one 40% trade if the 2% trades are negative EV and the 40% trade is a positive EV. That is from my very limited experience anyway.
Dhens, I think the risk: reward is important but hard to quantify the potential reward which is path dependent. All I can estimate is the potential runway for a trade. It might be large, say 1000 pips but might turn out to be 2000 pips or 200 pips and I get stopped out. I reckon though, if I see something with potential runway and the probability of win is high (e.g 0.8) then I would be happy to risk 25%-50% of my equity. I am not sure if this is prudent though. The problem is first to identify when to scale up and not to do this habitually otherwise it will certainly result in blow up. Perhaps 50% is too high, maybe I should have a 25% limit to position size.
