The 1% Rule: How Much to Risk Per Trade
A single discipline that, applied consistently, prevents almost every catastrophic account blowup. The math is simpler than the temptation to ignore it.
If trading were a vehicle, the 1% rule would be the seatbelt. It doesn't make you a better driver. It doesn't help you go faster. But when something goes wrong — and over a long enough timeline, something always does — it's the difference between walking away and not. Almost every experienced trader who's still trading uses some version of it. Almost every trader who blew up didn't.
What the 1% Rule Actually Says
Risk no more than 1% of your account on any single trade.
That's the whole rule. Note what it doesn't say: it doesn't say invest 1% — it says risk 1%. The distinction matters. On a $20,000 account, the 1% rule means a $200 maximum loss per trade. The position itself can be much larger.
An Example
You have $20,000. The 1% rule sets your maximum dollar loss per trade at $200.
You're considering a stock at $50 with a stop-loss at $48 — a $2 per-share risk. The position size formula gives you 100 shares ($200 ÷ $2). That 100-share position costs $5,000 — 25% of your account. But your risk is still only $200, which is the variable that matters.
If the stop hits, you lose 1% of your account. If the trade works, your upside is whatever the chart gives you, capped only by your exit plan.
Why 1%? The Math of Drawdowns
The 1% rule isn't a tradition. It comes from a hard mathematical fact: when you lose money, you need a larger percentage gain to recover than the percentage you lost.
| Drawdown | Gain to recover |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 30% | 43% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |
Lose 10% and you need an 11% gain — easy. Lose 50% and you need to double your money to break even — much harder. Lose 90% and recovery is a fantasy.
Now consider losing streaks. Even good strategies hand you 5, 8, 10 losses in a row eventually. At 1% per trade, ten consecutive losses is roughly a 10% drawdown — uncomfortable but normal. At 5% per trade, ten consecutive losses is a 40% drawdown. Now you need a 67% gain to recover. That can take years if it happens at all.
The 1% rule is the size that makes consecutive losses survivable. That's the entire justification.
Variations
The 0.5% Rule (Conservative)
For new traders, traders rebuilding after a drawdown, or anyone trading a new strategy they haven't proven yet. Slower growth, but a 20-trade losing streak still leaves you with most of your account.
The 2% Rule (Aggressive)
For experienced traders with proven edge. Faster growth, larger drawdowns. Requires real psychological discipline — at 2%, a five-trade losing streak hits you for 10%, and most people start to flinch.
Anything above 2%
Statistically risky. A trader risking 5% per trade and hitting an unlucky 8-trade losing streak — perfectly possible even with a 60% win rate over enough trades — is staring at a 33% drawdown. Most never recover, not because the math doesn't allow it, but because the psychology doesn't.
The Three Common Mistakes
1. Confusing position size with risk
"I bought 100 shares at $50, that's a $5,000 position, so my risk is $5,000." No. Your risk is whatever you'd lose if the stop hits — typically a fraction of position value. People who confuse these size up trades 20x larger than they intend to.
2. Skipping the rule on "high-conviction" setups
The trade you feel surest about is the one most likely to break the rule, because confidence makes you reach. The market doesn't care how sure you were. The rule applies equally to your highest-conviction trade and your shoulder-shrug trade.
3. Adjusting the rule after losses
"I'm down 5% this month, I need to make it back, let me risk 3% on this one." This is how traders go from down 5% to down 25% in a week. The rule is a constant. If anything, increase your discipline after losses, not your risk.
When the Rule Bends (Slightly)
There are a few cases where strict 1% needs nuance:
- Multiple correlated positions. If you have three different oil stocks open, all 1%, your real exposure to oil is 3%. Treat correlated positions as one position for risk-budget purposes.
- Earnings or news events. Stops can gap through. Either size smaller (0.5%) or close before the event.
- Very small accounts. On a $1,000 account, 1% is $10 — too small for most trades after fees and minimum share constraints. Either accept higher percentage risk consciously or wait until the account grows.
How to Actually Apply It
- Calculate your dollar risk. Account × 1% = max loss per trade.
- Set your stop based on the chart. Where does your thesis fail?
- Calculate position size. Dollar risk ÷ (entry − stop) = shares.
- Place the order. Check that the share count matches your math.
- Don't move the stop. Once it's set, it's set. Moving it to "give the trade more room" defeats the entire system.
Repeat this on every trade. Not most. Every. The rule's value comes from consistency.
Use the Calculators
The position-size calculator on the home page applies the 1% rule by default — change the percentage if you want, and it recomputes share count automatically.
The Bottom Line
The 1% rule is famous because it works, and it works because it's simple enough to actually follow. Sophisticated risk management — Kelly Criterion, volatility targeting, optimal-f sizing — has a place for advanced traders. But none of it matters if you don't have a basic discipline first. Start at 1%. Stay there until you have a documented edge over hundreds of trades. Move only after the data justifies it.
Trading is a long game. The traders who win it are the ones who don't lose it.
Frequently Asked
Should I use 1% of my total account or my "trading capital"?
Use the total of whatever you're willing to put at risk. If you have a $50,000 brokerage account but only consider $20,000 of it "trading capital" — the rest being long-term holds — then 1% is $200, not $500.
Does the 1% rule apply to options?
The principle does. The math is more complicated because options have non-linear risk. A simple version: don't put more than 1-2% of your account into a single options position where you'd accept 100% loss of that position.
If I'm winning, can I increase my risk per trade?
Yes — proportionally. As your account grows, 1% grows with it. If your $20,000 account becomes $40,000, your 1% risk doubles from $200 to $400 organically. The percentage stays constant; the dollar amount grows.
What if I have many small trades open at once?
Cap total open risk at 5-6% of your account. Even at 1% per trade, ten simultaneous open positions means 10% at risk if everything goes wrong at once — and correlated markets do that occasionally.