The 1% Rule: Never Risk More Than This on a Trade

The 1% rule is the single most important principle in trading. It states: Never risk more than 1% of your trading capital on a single trade. Follow this rule, and you can survive 100 consecutive losses (highly unlikely). Violate it, and you can blow up your account in a week. It's that simple, and that critical.

What is the 1% Rule?

Definition: Never risk more than 1% of your total trading capital on any single trade.

What "Risk" Means: The difference between your entry price and stop loss price, multiplied by your position size. This is what you'll lose if your stop is hit.

Example:

• Trading account: $10,000
• 1% of $10,000 = $100
• Maximum risk per trade = $100
• That's what you can afford to lose if stopped out

Not:

• 1% position size (that's different)
• 1% of profit (that's different)
• 1% account value fluctuation (that's different)

Specifically: If your stop loss is hit, you lose exactly $100 (1% of account).

Why 1%?

The Survival Math

With 1% Risk:

• Need 100 consecutive losses to blow up
• Probability with 50% win rate: Astronomically low
• You can be wrong 50 times, still have half your capital

With 5% Risk:

• Need 20 consecutive losses to blow up
• Probability: Very possible (5-6 losing streaks happen)
• 10 losses = down 50% (need 100% gain to recover)

With 10% Risk:

• Need 10 consecutive losses to blow up
• Probability: Common (happens to everyone eventually)
• 5 losses = down 50%
• 7 losses = down 70% (nearly impossible to recover)

The Math: Risk 1% = practically impossible to blow up Risk >5% = highly likely to blow up eventually

The Recovery Math

Why Small Losses Matter:

To recover from 10% loss, need 11.1% gain To recover from 20% loss, need 25% gain To recover from 30% loss, need 42.9% gain To recover from 50% loss, need 100% gain To recover from 70% loss, need 233% gain

With 1% Rule:

• Worst realistic scenario: Down 10-15% (need 11-17% to recover)
• Very recoverable

Without 1% Rule:

• Realistic scenario: Down 50%+ (need 100%+ to recover)
• Career-ending

The Psychological Benefit

Risking 1%:

• You don't care about individual trades
• No emotional attachment
• Easy to cut losses
• Easy to take next trade
• Sleep well at night

Risking 10%:

• Every trade feels life-or-death
• Severe emotional stress
• Can't cut losses ("too much invested")
• Paralyzed after loss
• Constant anxiety

The 1% rule protects your psychology as much as your capital.

How to Calculate Position Size

The Formula

Position Size = Risk Amount / (Entry Price - Stop Loss Price)

Step by Step:

1. Determine Risk Amount Account size × 1% = Maximum risk in dollars Example: $10,000 × 0.01 = $100

2. Determine Stop Loss Distance Entry price - Stop loss price = Distance per share Example: Entry $50, Stop $48 = $2 per share

3. Calculate Position Size Risk amount ÷ Stop distance = Number of shares Example: $100 ÷ $2 = 50 shares

Detailed Example: Stocks

Your Account: $25,000 Risk: 1% = $250

Trade Setup:

• Stock: XYZ
• Entry: $75
• Stop loss: $72 (below support)
• Stop distance: $3 per share

Position Size: $250 ÷ $3 = 83.33 shares Buy: 83 shares (round down)

Risk Verification: 83 shares × $3 stop = $249 risk ✓ (under $250)

Position Value: 83 shares × $75 = $6,225 (24.9% of account)

Note: Position size is 25% of account, but risk is only 1%.

Detailed Example: Forex

Your Account: $5,000 Risk: 1% = $50

Trade Setup:

• Pair: EUR/USD
• Entry: 1.1000
• Stop loss: 1.0950 (50 pips)
• Stop distance: 50 pips

Position Size: For EUR/USD, 1 standard lot (100,000 units) = $10 per pip

$50 risk ÷ 50 pips = $1 per pip $1 per pip = 0.1 lots (10,000 units)

Risk Verification: 0.1 lots × 50 pips × $1 = $50 risk ✓

Detailed Example: Futures

Your Account: $50,000 Risk: 1% = $500

Trade Setup:

• Contract: ES (E-mini S&P 500)
• Entry: 4500
• Stop loss: 4490 (10 points)
• Stop distance: 10 points

Point Value: ES = $50 per point

$500 risk ÷ (10 points × $50) = $500 ÷ $500 = 1 contract

Risk Verification: 1 contract × 10 points × $50 = $500 risk ✓

Detailed Example: Crypto

Your Account: $20,000 Risk: 1% = $200

Trade Setup:

• Coin: Bitcoin
• Entry: $40,000
• Stop loss: $39,000 (below support)
• Stop distance: $1,000 per BTC

Position Size: $200 ÷ $1,000 = 0.2 BTC

Risk Verification: 0.2 BTC × $1,000 = $200 risk ✓

Position Value: 0.2 BTC × $40,000 = $8,000 (40% of account)

Common Mistakes

Mistake 1: Confusing Position Size with Risk

Wrong Thinking: "1% rule means I can buy $100 of stock with $10,000 account."

Reality: Risk is determined by stop loss distance, not purchase amount.

Example:

• Account: $10,000 (1% = $100 risk)
• Stock at $50, stop at $49.50 (50 cent stop)
• Correct position: $100 ÷ $0.50 = 200 shares = $10,000 position
• Your entire account, but only risking $100 (1%)

Lesson: Position size can be large if stop is tight. Position size can be small if stop is wide. Risk is what matters.

Mistake 2: Risking More Because "High Confidence"

Wrong Thinking: "This setup is perfect. I'll risk 5% instead of 1%."

Reality:

• No trade is guaranteed
• Your "best" setups still lose 30-40% of time
• One unexpected loss at 5% = five normal losses
• Eventually that "sure thing" loses

Lesson: Risk 1% ALWAYS. No exceptions. Confidence doesn't change math.

Mistake 3: Not Adjusting for Account Changes

Wrong Thinking: "My account was $10,000 ($100 risk). Now it's $15,000, but I'll keep risking $100."

Reality:

• Account grew = risk should grow
• 1% of $15,000 = $150
• You're now risking 0.67% (too conservative)
• Growth compounds slower

Also:

• Account shrunk to $8,000
• Still risking $100 = 1.25% (too aggressive)
• Risking more when losing = bad idea

Lesson: Recalculate 1% based on CURRENT account size. Daily or weekly.

Mistake 4: Moving Stop Loss to Risk More

Wrong Thinking: "Stop should be $5 away, but that's too big. I'll put it $2 away and risk more shares."

Reality:

• Stop at $2 gets hit on normal volatility
• Stopped out on trades that would have won
• Trying to "cheat" the 1% rule
• Lose 5 trades at 1%, could have won 3 if stopped properly

Lesson: Stop loss based on technical levels, THEN calculate position size. Never compromise stop to get bigger position.

Mistake 5: Multiple Positions = Multiple Risk

Wrong Thinking: "I'll risk 1% on EUR/USD, 1% on GBP/USD, 1% on USD/JPY. That's fine."

Reality:

• All three are correlated
• If dollar strengthens, all three lose
• Actual risk: 3% (not 1%)
• Concentrating risk without realizing

Lesson: Consider correlation. Multiple positions in same sector/currency = multiplied risk. Either reduce to 0.5% each, or choose one.

The 1% Rule Variations

Conservative: 0.5% Rule

When to Use:

• Beginning trader (less than 6 months)
• Learning new strategy
• Volatile market conditions
• Multiple correlated positions
• Rebuilding after drawdown

Benefits:

• Even safer (need 200 losses to blow up)
• Easier psychologically
• Builds confidence
• Longer survival

Trade-off:

• Slower growth
• Need higher win rate or R:R to profit meaningfully

Aggressive: 2% Rule

When to Use:

• Experienced trader (2+ years profitable)
• Very high confidence in edge
• Small account trying to grow faster
• Understand and accept higher variance

Risks:

• 50 losses = blown account (much more likely than 100)
• Drawdowns deeper and harder to recover
• More psychological stress
• One bad week can set you back months

Recommendation: Only use 2% if:

• You've been profitable for 2+ years at 1%
• You have extensive track record
• You truly understand the risks
• You're prepared for 20-30% drawdowns

Most traders should stick with 1%.

The Portfolio Approach

Concept: Maximum risk across all positions = 5-6%

Example:

• 5 positions open
• 1% risk each
• Total portfolio risk = 5%
• If all hit stops (unlikely) = down 5%

Why:

• Diversification
• If one stops out, still have 4 running
• Reduces impact of any single loss
• Professional approach

Rules:

• Maximum 1% per position
• Maximum 5-6% total portfolio risk
• Never exceed total risk limit
• Consider correlation

Real-World Examples

Example 1: Saved by 1% Rule

Trader A:

• Account: $50,000
• Risks 1% = $500 per trade
• Experiences 8 consecutive losses (rare but possible)
• Total loss: $4,000 (8%)
• Account now: $46,000
• Needs 8.7% gain to recover
• Painful but survivable
• Continues trading, eventually profitable

Trader B (No Rule):

• Account: $50,000
• Risks 10% = $5,000 per trade
• Experiences same 8 losses
• Total loss: $40,000 (80%)
• Account now: $10,000
• Needs 400% gain to recover
• Psychologically destroyed
• Quits trading

Same trades, different risk management. One survives, one doesn't.

Example 2: Compounding with 1% Rule

Starting Account: $10,000

Month 1:

• Risk 1% = $100 per trade
• 20 trades: 12 wins, 8 losses
• Average win $150, average loss $100
• Net: (12 × $150) - (8 × $100) = +$1,000
• Account: $11,000

Month 2:

• Risk 1% = $110 per trade (recalculated)
• 20 trades: 13 wins, 7 losses
• Average win $165, average loss $110
• Net: (13 × $165) - (7 × $110) = +$1,375
• Account: $12,375

Month 3:

• Risk 1% = $124 per trade
• Net profit: $1,200
• Account: $13,575

After 12 months:

• Account: $23,000+
• Over 100% return
• Never risked more than 1%
• Survived all drawdowns

This is realistic with 60% win rate and 1.5:1 reward-risk.

How to Implement the 1% Rule

Step 1: Calculate Your Risk

Current Account Balance: $_______ 1% of Account: $_______ This is your maximum risk per trade.

Step 2: Pre-Trade Checklist

Before EVERY trade:

□ What's my entry price? □ What's my stop loss price? □ What's the distance? (Entry - Stop) □ What's my 1% risk in dollars? □ Position size = Risk $ ÷ Distance □ Does this position size make sense? □ Am I 100% committed to this stop?

Step 3: Set Stop Loss First

Order:

1. Determine proper stop (technical level)
2. Calculate position size (based on stop)
3. Enter trade

Never:

1. Decide position size
2. Try to find stop that fits
3. Enter trade with arbitrary stop

The stop determines the position size, not the other way around.

Step 4: Use Position Size Calculators

Tools:

• TradingView has built-in calculator
• MyFXBook position size calculator (forex)
• Most broker platforms have tools
• Excel spreadsheet (create your own)

Don't: Guess or do mental math. Use tools. Precision matters.

Step 5: Review Daily

End of Day:

• What did I risk today? (should be 1% per trade)
• Did I follow the rule?
• Any violations? Why?
• What will I do differently tomorrow?

Weekly:

• Maximum daily risk (should be 3-5% if 3-5 trades)
• Was I consistent?
• Any position too large?

The Bottom Line

You can have the best strategy in the world. You can read every chart perfectly. You can have impeccable timing.

But if you don't follow the 1% rule, you will fail.

One bad week. One unexpected gap. One "sure thing" that fails. That's all it takes to blow up an account without proper risk management.

The 1% rule isn't exciting. It's not sexy. It feels too conservative when you're starting with a small account.

But it's the difference between:

• Surviving vs blowing up
• Career trading vs gambling
• Professional vs amateur
• Rich vs broke

Conclusion: Survival First, Profits Second

The 1% rule is non-negotiable. It's not a suggestion. It's not "for beginners only." It's the foundation of every successful trader's risk management system. Follow it religiously, and you'll survive long enough to become profitable. Violate it, and you're gambling, not trading.

Key Takeaways:

• Never risk more than 1% per trade - no exceptions
• Risk = (Entry - Stop) × Position Size - actual dollar amount you lose if stopped
• Stop loss determines position size - not the other way around
• Recalculate daily - 1% of CURRENT account balance
• No "high confidence" exceptions - 1% ALWAYS
• Consider correlation - multiple positions can multiply risk
• Survival = Success - protect capital above all

Your Commitment: Starting today, I will risk maximum 1% per trade. No exceptions. I will calculate position size based on my stop loss. I will use tools to be precise. I will review my risk daily. I commit to survival, knowing profits will follow.

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