TL;DR: The 1% risk rule means you never risk more than 1% of your total trading capital on one trade. Position size follows from the formula: risk amount divided by the distance to your stop-loss. That way you know the intended maximum loss in advance. Note that with a price gap or fast market the actual loss can exceed your stop.
What can you expect?
- Time per week
- The calculation takes a few minutes per trade. Total time depends on your style: 15 minutes to several hours per week.
- Starting capital
- No minimum, but on small accounts 1% is a small amount (at €2,500 that is €25). Order costs and spread can then eat a large part of the risk. Start with a demo account.
- Typical setbacks
- Streaks of several losses happen with every strategy. Stops are sometimes hit just before the price moves your way. In a gap your loss is larger than 1%.
- Costs
- Watch order costs, spread (the gap between buy and sell price) and any currency costs. With a small risk amount, fixed costs per order weigh heavily. Compare costs between brokers.
- Not suitable if…
- Not for anyone who cannot or will not cap risk per trade, or who is looking for a guaranteed profit: none exists.
How it works
The 1% risk rule is a common rule of thumb for risk management: on each trade you accept losing at most 1% of your trading capital if your stop-loss is hit. With €25,000 that is at most €250 per trade. The rule says nothing about when to buy or sell. It only sets how large your position may be, so you can sit through a string of losses without serious damage to your account. It does not guarantee profit: a strategy without an edge simply loses more slowly with 1% risk.
Core principles
- 1. Calculate 1% of your trading capital before every trade
- 2. Set the stop-loss from the chart, not from the amount you want to risk
- 3. Adjust position size, never the stop
- 4. Do not add to a losing position (no averaging down)
Step-by- step plan
- 1
Calculate your risk amount
Take your current trading capital and calculate 1%. Update this amount as your capital changes.
- 2
Decide your stop-loss first
Choose a stop level where your trade idea is no longer valid, for example below a support level. Do not choose it based on the amount you want to risk.
- 3
Calculate position size
Position size = risk amount divided by the distance between entry and stop. Round down.
- 4
Place the stop-loss order immediately
Enter the stop-loss order in the market right after entry. A mental stop is not a stop.
- 5
Review weekly
Record risk, outcome and whether you followed the rules for each trade. Check whether losses stayed below 1% of capital.
In detail
What the rule does and does not do
The 1% risk rule sets how much you may lose per trade, not what to buy. It is a position-sizing method. It is widely known among traders and often mentioned in risk-management books, but it is a general rule of thumb. Some traders use 0.5%, others 2%.
The rule can protect your account against a string of losses. It cannot stop a strategy without an edge from losing over time, and it does not protect against gaps where your stop is filled at a worse price.
The arithmetic of recovery
Loss and recovery are not symmetrical. After 10 losses in a row you keep:
- at 1% risk: 0.99^10 = 90.4% of capital (loss 9.6%). Recovery needs +10.6%.
- at 5% risk: 0.95^10 = 59.9% (loss 40.1%). Recovery needs +67%.
- at 10% risk: 0.90^10 = 34.9% (loss 65.1%). Recovery needs +187%.
Recovery formula: required gain = 1 divided by (1 minus loss) minus 1. A smaller risk per trade keeps the road back short.
Calculating position size
Step 1: calculate your risk amount (1% of capital). Step 2: determine the distance between entry price and stop. Step 3: divide the risk amount by that distance and round down. A wide stop gives a small position, a tight stop a larger one. The amount you risk stays the same.
Also check that the position fits your account: a very tight stop can produce a position that fills your whole account.
Psychology and discipline
A fixed, small risk makes it easier to stay calm. Traders who risk a lot per trade often hold losers too long or take profits too early. A written rule helps, but only if you follow it. Record exceptions in your trading journal so you can see how often you deviate.
- Basic chart reading
- A trading plan with entry and exit rules
- Discipline to follow rules
- Position-size calculator
- Charting platform
- Stop-loss orders at your broker
- 01 You have a clear entry signal from your own trading plan
- 02 Your stop-loss sits where your trade idea is no longer valid
- 03 Position size is chosen so the loss at the stop is about 1% of capital
- 04 No stop-loss defined: no trade
- 01 Your stop-loss is hit: you close the position without moving the stop
- 02 Your price target is reached (many traders use 2 to 3 times the risk, but that is a choice, not a rule)
- 03 Market conditions change so your trade idea no longer applies
Worked example
This is a hypothetical example with simple numbers. It is not advice or an expectation.
- Trading capital: €25,000
- Risk per trade: 1% = €250
- Entry price: €40.00, stop-loss: €38.50
- Distance to stop: €40.00 - €38.50 = €1.50
Position size = €250 / €1.50 = 166.7, so 166 shares (rounded down).
Position value: 166 x €40 = €6,640 (26.6% of capital). Loss at the stop: 166 x €1.50 = €249, about 1% of capital, before order costs.
If the price gaps below your stop and opens at €37.00, the loss is 166 x €3.00 = €498 (2%). The rule limits risk but does not remove it.
Hypothetical example, not advice.
Work it out yourself
Risks and risk management
- A price gap (for example after news or outside trading hours) can make your loss larger than 1%
- Several positions in the same sector or market often move together, so total risk is higher than 1%
- On small accounts, order costs and spread weigh heavily on a small risk amount
- The rule protects capital but does not make a strategy without an edge profitable
- Cap total open risk, for example at 5% of capital across all positions
- Lower risk to 0.5% after a losing streak or while you are still learning
- Use a real stop-loss order instead of a mental stop
- Review your trades every week in a trading journal
Learn the basics
Key takeaways
- It is about survival: with 1% risk, 10 losses in a row cost about 9.6% of capital; with 10% risk about 65%.
- The bigger the loss, the more profit you need to recover: after -50% you need +100%.
- Formula: position size = risk amount divided by distance to the stop. A wide stop therefore means a smaller position.
- The rule lowers risk per trade but does not change whether a strategy works. Test your approach on a demo account first.
Frequently asked questions
Does the 1% rule work for a small account of €5,000? +
Yes, but your risk per trade is then €50. Fixed order costs of a few euros are a noticeable part of that. Compare costs between brokers and test on a demo account first.
Can I risk 2% if a setup looks strong? +
It is your choice, but a rule with exceptions loses its power. Feeling that a setup is strong is exactly when emotion creeps in. If you want to risk more, change your fixed percentage for all trades, not trade by trade.
How much time does this rule take? +
The calculation takes a few minutes per trade. The rest of your time depends on your trading style.
What if my stop is far away and the position becomes very small? +
Then the trade does not fit your account or the entry is poor. Skip it or wait for an entry closer to your stop. A small position is better than breaking the rule.
Origin
General technique