Trading realityUpdated 2 min readBy the FXNOD team
The 1% rule in trading: what it is and how to apply it
The 1% rule says you should not risk more than 1% of your trading account on a single trade. With 1,000, the most you can lose on one trade is 10. It applies to the amount lost if your stop is hit, not to the size of the position. Its purpose is survival: a long losing streak leaves most of the account intact.
Applying it
Take 1% of the account
That is the money at risk on the next trade.
Find the stop distance from the chart
Where the trade is wrong.
Divide
Money at risk divided by the loss per unit at that stop gives the position size.
For options, the stake is the risk
So the stake is 1% of the account.
What it protects you from
| Losses in a row | Account left at 1% risk | At 5% risk | At 10% risk |
|---|---|---|---|
| 5 | 95% | 77% | 59% |
| 10 | 90% | 60% | 35% |
| 20 | 82% | 36% | 12% |
| 30 | 74% | 21% | 4% |
Twenty losses in a row is rare for a single streak, and twenty net losses over a few hundred trades is not. At 1% it is a bad stretch. At 10% it is the end.
Common misunderstandings
- It is not 1% of the account as position size. A position can be many times the account if the stop is close.
- It is not a target. You do not need to risk 1% on every trade.
- It does not make a losing method profitable. It makes it lose slowly.
- Several trades open at once on related markets are one risk, not several.
1% or 2%?
Both are used. Beginners and anyone without a measured edge should stay at 1% or below. With a very small account, the minimum trade size may force a higher figure, which is a reason to trade a product with a smaller minimum, not to accept the risk.
A daily version
Pair it with a daily limit, such as 3% of the account. Three losses and the day is over. This stops the rule being followed trade by trade while the session as a whole runs out of control.
With a bot
For a flat-stake bot, set the stake at about 1% of the session's stop loss and the stop loss at a small share of the account. If the stake can grow after losses, the 1% rule must be applied to the largest stake the settings allow, which usually shows that the progression is too aggressive.
Questions people ask
- Is the 1% rule too conservative?
- It feels slow. It is what lets you survive long enough to find out whether your method works.
- Does the 1% rule apply to position size?
- No. It applies to the amount you lose if the stop is hit.
- What if 1% is smaller than the minimum trade?
- The account is too small for that market. Choose a product with a smaller minimum or add funds you can afford to lose.
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