The 1% Rule: Why Most Traders Get Position Sizing Wrong

You have $10,000. You find a perfect setup. You're convinced this is the one. You go all in. Price moves against you. You panic. You hold, hoping it comes back. It drops more. You finally exit with a $3,000 loss. Your account is down 30%. One trade. Now you're angry, scared, and desperate. You double your size on the next trade to "make it back." That trade fails too. Now you're down 60%. Two trades. Your trading career is effectively over. Meanwhile, another trader with the exact same strategy took the same trades, risked 1% per trade, lost $100 on the first trade and $100 on the second. Their account is down 2%. They're fine. They'll trade tomorrow. They'll be profitable next month. The difference between blowing up and staying in the game? Position sizing. The 1% rule.

What Is the 1% Rule?

The Definition

Risk a maximum of 1% of your account balance on any single trade.

That's it. That's the entire rule. Simple. Powerful. Account-saving.

What it means:

• If you have a $10,000 account, your maximum risk per trade is $100
• If you have a $50,000 account, your maximum risk per trade is $500
• If you have a $5,000 account, your maximum risk per trade is $50

What it doesn't mean:

• Not 1% of your account as position size (that's different)
• Not "I'll risk 1% unless I'm really sure, then 5%"
• Not "I'll risk 1% per trade, but I'll take 20 trades today"
• Not "I'll risk 1%, but if I'm down, I'll double up"

1% means 1%. No exceptions. No negotiations. No "this time is different."

Why 1%? Why Not 2% or 5%?

The math is brutal and unforgiving.

Drawdown recovery math:

Reality check:

• Lose 10% of your account? You need an 11% gain to get back to even. Achievable.
• Lose 50% of your account? You need a 100% gain to break even. Extremely difficult.
• Lose 90% of your account? You need a 900% gain. Nearly impossible.

Risking 5% per trade:

• 5 losing trades in a row = 25% drawdown (requires 33% return to recover)
• 10 losing trades in a row = 50% drawdown (requires 100% return to recover)
• 20 losing trades in a row = 75% drawdown (requires 300% return to recover)

Risking 1% per trade:

• 5 losing trades in a row = 5% drawdown (requires 5.3% return to recover)
• 10 losing trades in a row = 10% drawdown (requires 11% return to recover)
• 20 losing trades in a row = 19% drawdown (requires 23% return to recover)

See the difference? At 1% risk, you can have a catastrophic month (20 losses in a row) and still recover within a few weeks. At 5% risk, 20 losses in a row destroys your account.

How to Calculate Position Size Using the 1% Rule

The Formula

Position Size = (Account Size × Risk Percentage) ÷ Stop Loss Distance

Example 1: Stock Trade

You have a $10,000 account. You want to buy XYZ stock at $100. Your stop loss is at $95.

Step 1: Calculate your risk amount $10,000 × 1% = $100 maximum risk

Step 2: Calculate stop loss distance $100 - $95 = $5 per share

Step 3: Calculate position size $100 ÷ $5 = 20 shares

Position value: 20 shares × $100 = $2,000 (20% of account) Risk: 20 shares × $5 stop = $100 (1% of account)

Example 2: Forex Trade

You have a $5,000 account. You want to go long EUR/USD at 1.1000. Your stop loss is at 1.0950 (50 pips).

Step 1: Calculate your risk amount $5,000 × 1% = $50 maximum risk

Step 2: Convert pips to dollars With a standard lot (100,000 units), 1 pip = $10 50 pips = $500 per lot

Step 3: Calculate position size $50 ÷ $500 = 0.1 lots

Position value: 0.1 lots × 100,000 = 10,000 units (€10,000) Risk: 50 pips × $1 per pip (0.1 lot) = $50 (1% of account)

Example 3: Crypto Trade

You have a $20,000 account. You want to buy BTC at $50,000. Your stop loss is at $47,500.

Step 1: Calculate your risk amount $20,000 × 1% = $200 maximum risk

Step 2: Calculate stop loss distance $50,000 - $47,500 = $2,500

Step 3: Calculate position size in BTC $200 ÷ $2,500 = 0.08 BTC

Position value: 0.08 BTC × $50,000 = $4,000 (20% of account) Risk: 0.08 BTC × $2,500 = $200 (1% of account)

Position Size vs. Risk Amount

Critical distinction:

Your position size (total dollars invested) can be much larger than 1% of your account. Your risk amount (maximum loss if stopped out) should be 1%.

Example:

• Account: $10,000
• Trade: Buy stock at $100, stop at $95
• Position size: 20 shares × $100 = $2,000 (20% of account)
• Risk amount: 20 shares × $5 = $100 (1% of account)

This is fine. You're risking 1%, even though you have 20% of your account in the trade.

What changes your position size:

• Smaller stop loss = larger position size (same risk)
• Larger stop loss = smaller position size (same risk)

Example:

Trade A: Stop at $95 (5% drop from $100 entry) Risk amount: $100 Position size: 20 shares ($2,000 invested)

Trade B: Stop at $90 (10% drop from $100 entry) Risk amount: $100 Position size: 10 shares ($1,000 invested)

Same risk. Different position sizes based on stop loss distance.

When to Use Less Than 1%

Start Small: The 0.25% Rule

When you're:

• Learning a new strategy
• Trading a new market
• Returning after a break
• Recovering from a drawdown
• Feeling emotional or stressed

Start at 0.25% risk per trade.

Example: $10,000 account Risk: 0.25% = $25 per trade

You can take 40 consecutive losing trades before hitting a 10% drawdown.

Why start small?

• Preserves capital while learning
• Reduces emotional pressure
• Allows you to survive mistakes
• Builds confidence slowly

When to increase to 1%:

• After 20 consecutive trades following your rules
• After proving the strategy works
• When trading becomes boring (not emotional)
• When your win rate and risk/reward are consistent

The Volatility Adjustment

High volatility? Reduce your risk.

Normal market (ATR normal): Risk 1% High volatility (ATR 2x normal): Risk 0.5% Extreme volatility (ATR 3x+ normal): Risk 0.25% or don't trade

Example:

Stock XYZ normally moves $2 per day (ATR = $2). Today, news is coming. ATR jumps to $6.

Normal stop: $5 below entry = 1% risk High volatility stop: $15 below entry = 0.33% risk (to keep same dollar risk)

OR

Normal stop: $5 below entry = 1% risk High volatility: Same stop, but cut position size by 66%

Why: Volatility expansion means wider swings. Your stops are more likely to get hit. Reduce risk to survive the noise.

The Most Common Position Sizing Mistakes

Mistake 1: Risking Based on Conviction

Thinking: "This is a sure thing. I'll risk 5% instead of 1%."

Reality: You don't know what's a "sure thing." The most confident traders lose the most when they're wrong because they sized too large.

Fix: Risk 1% on every trade. No exceptions. Confidence doesn't predict outcomes.

Mistake 2: Risking Based on Account Size

Thinking: "I only have $2,000. 1% is only $20. That's not worth it. I'll risk 10%."

Reality: Small accounts need small risk even more. One 10% loss on a small account is devastating.

Fix: If 1% seems too small, your account is too small for trading. Save more money. Trade demo. Don't blow up trying to accelerate.

Mistake 3: Ignoring Stop Loss Distance

Thinking: "I'll buy 100 shares regardless of where my stop is. I'll just move my stop wider to avoid getting stopped out."

Reality: Moving stops wider doesn't reduce risk. It increases risk (wider stop = larger loss if hit). Plus, you're now violating your strategy.

Fix: Set your stop based on technical levels. Calculate position size from that stop. If the stop requires a position size that's too small, pass on the trade.

Mistake 4: Increasing Size After Losses

Thinking: "I'm down $500. I'll risk 3% on this next trade to make it back faster."

Reality: This is revenge trading. You're about to turn a bad month into a catastrophe.

Fix: After losses, reduce risk to 0.5% or 0.25%. Rebuild confidence slowly. Never increase size after losses.

Mistake 5: Martingale Progressions

Thinking: "I'll risk 1%, then 2%, then 4%, then 8%. Each time I lose, I double. When I finally win, I recover all losses plus profit."

Reality: This is a casino strategy designed for games with 50/50 odds. Markets don't work that way. You'll blow up. It's mathematical certainty.

Fix: Never increase position size after a loss. Ever.

Mistake 6: Averaging Down

Thinking: "I bought at $100. It dropped to $95. I'll buy more at $95 to lower my average. Then I don't need such a tight stop."

Reality: You're throwing good money after bad. If the trade was good at $100, you should have sized correctly. If it wasn't, why add more?

Fix: One entry per trade. If you missed the proper entry, wait for the next setup. Don't average down.

Mistake 7: Correlation Blindness

Thinking: "I'm risking 1% on AAPL, 1% on MSFT, 1% on GOOGL, 1% on AMZN, 1% on TSLA. Five trades, each 1% risk. Total risk: 5%."

Reality: These are all tech stocks. When tech sells off, they all drop together. You're not risking 1% × 5. You're risking 5% on one correlated bet.

Fix: Calculate correlation-adjusted risk. If all 5 positions are highly correlated, your total risk is closer to 5% than 1%. Either reduce position sizes or diversify across uncorrelated assets.

Advanced Position Sizing Techniques

The Kelly Criterion (For Math Geeks)

The Kelly Criterion calculates the optimal position size based on your edge.

Formula:

Kelly % = (Win Rate × Average Win) - (Loss Rate × Average Loss) ÷ Average Win

Example:

• Win rate: 55%
• Average win: $200
• Average loss: $100

Kelly % = (0.55 × 200 - 0.45 × 100) ÷ 200 Kelly % = (110 - 45) ÷ 200 Kelly % = 65 ÷ 200 Kelly % = 32.5%

Reality check: Kelly says risk 32.5% of your account per trade.

Problem: Kelly assumes you know your exact win rate and average win/loss. You don't. It also assumes infinite divisibility of bets and no emotional impact. Markets don't work that way.

Practical application: Use Half-Kelly or Quarter-Kelly.

Half-Kelly: 32.5% ÷ 2 = 16.25% (still too high for most traders) Quarter-Kelly: 32.5% ÷ 4 = 8% (more reasonable, but still aggressive)

For most traders: Stick to 1%. It's simple, it's conservative, and it works.

Volatility-Adjusted Position Sizing

Use the Average True Range (ATR) to adjust position size based on volatility.

Formula:

Position Size = (Account × Risk%) ÷ (ATR × Multiplier)

Example:

• Account: $10,000
• Risk: 1% = $100
• ATR (14-day): $2
• Multiplier: 2× ATR for stop loss

Stop distance: $2 × 2 = $4 Position size: $100 ÷ $4 = 25 shares

Why it works: When volatility expands, ATR increases. Your position size automatically decreases. When volatility contracts, ATR decreases. Your position size automatically increases.

Result: You're taking consistent risk across different volatility environments.

Equity Curve Adjustments

Adjust your risk based on your equity curve.

Strategy: Anti-Martingale

When your account is growing → increase size slowly When your account is shrinking → decrease size quickly

Example:

Base risk: 1%

Account value increases by 25% → increase risk to 1.25% Account value increases by 50% → increase risk to 1.5%

Account value decreases by 10% → decrease risk to 0.75% Account value decreases by 20% → decrease risk to 0.5%

Why it works: You're trading larger when you're winning (confidence high, edge proven). You're trading smaller when you're losing (confidence low, something broken).

Implementation:

• Recalculate your 1% dollar amount monthly
• If up last month: increase by 0.1-0.25%
• If down last month: decrease by 0.25-0.5%
• Never exceed 2% risk
• Never go below 0.25% risk (unless rebuilding from blowout)

How Many Trades Should You Have at Once?

Portfolio Heat

Your "portfolio heat" is your total open risk across all positions.

Conservative: Maximum 3-5% total portfolio heat

• Example: 5 positions × 1% risk each = 5% total open risk

Aggressive: Maximum 6-10% total portfolio heat

• Example: 10 positions × 1% risk each = 10% total open risk

Reality check: If all positions hit stops simultaneously, that's your maximum drawdown from open positions.

Example: $10,000 account 5 positions open, each 1% risk All 5 stop out at once Total loss: $500 (5%)

Survivable? Yes. Comfortable? Maybe not.

Adjust based on:

• Your tolerance for drawdown
• Correlation between positions
• Market volatility
• Your experience level

Correlation Matters More Than Position Count

Scenario A: 5 positions in 5 different sectors Each 1% risk Total risk: ~5%

Scenario B: 5 positions all in tech stocks Each 1% risk Total risk: ~5% × correlation factor

If tech crashes, all 5 positions drop together. Your effective risk: closer to 5% than 1% × 5.

Rule of thumb:

• Uncorrelated positions: Add up the risks
• Moderately correlated: Multiply total by 1.5
• Highly correlated: Multiply total by 2-3

Example:

5 tech positions, each 1% Uncorrelated calculation: 5% total risk Correlated reality: 5% × 2 = 10% effective risk

Fix: If you're trading correlated assets, reduce position sizes or trade fewer positions.

The 1% Rule in Practice: A Case Study

Let's see what happens when two traders take the exact same trades with different position sizing.

Trader A: 5% risk per trade Trader B: 1% risk per trade

Account: $10,000 each

Month 1: Both take 20 trades

• Win rate: 50% (10 wins, 10 losses)
• Average win: $200 per trade (at 1% risk)
• Average loss: $100 per trade (at 1% risk)

Trader A (5% risk):

• Total wins: 10 × $1,000 = $10,000
• Total losses: 10 × $500 = $5,000
• Net profit: $5,000
• Return: 50%

Trader B (1% risk):

• Total wins: 10 × $200 = $2,000
• Total losses: 10 × $100 = $1,000
• Net profit: $1,000
• Return: 10%

Looks like Trader A won, right? Wrong.

Month 2: Bad month

• Both take 20 trades
• Win rate: 30% (6 wins, 14 losses)
• Same average win/loss amounts

Trader A (5% risk):

• Total wins: 6 × $1,000 = $6,000
• Total losses: 14 × $500 = $7,000
• Net loss: -$1,000
• Account: $14,000 (down from $15,000)

Trader B (1% risk):

• Total wins: 6 × $200 = $1,200
• Total losses: 14 × $100 = $1,400
• Net loss: -$200
• Account: $10,800 (down from $11,000)

Month 3: Catastrophic month

• Both take 20 trades
• Win rate: 20% (4 wins, 16 losses)
• Same average win/loss amounts

Trader A (5% risk):

• Total wins: 4 × $1,000 = $4,000
• Total losses: 16 × $500 = $8,000
• Net loss: -$4,000
• Account: $10,000 (back to starting point, 3 months wasted)
• Psychological state: Destroyed, revenge trading imminent

Trader B (1% risk):

• Total wins: 4 × $200 = $800
• Total losses: 16 × $100 = $1,600
• Net loss: -$800
• Account: $10,000 (back to starting point)
• Psychological state: Frustrated but calm, still following rules

See the difference?

Trader A had big swings but ended at break-even after 3 months, with shattered confidence.

Trader B had smaller swings but also ended at break-even after 3 months, with discipline intact.

Now comes Month 4: Both traders hit a hot streak

• Win rate: 70% (14 wins, 6 losses)
• Same average win/loss amounts

Trader A (5% risk, but now emotional):

• He's impatient from the drawdown
• He starts risking 10% to "make it back"
• Psychology destroyed → mistakes multiply
• Likely blows up or takes massive losses

Trader B (1% risk, disciplined):

• Total wins: 14 × $200 = $2,800
• Total losses: 6 × $100 = $600
• Net profit: $2,200
• Account: $12,200 (22% return from start)
• Psychological state: Confident, patient, following rules

Lesson: Trader B wins in the long run because Trader A self-destructed. The 1% rule keeps you in the game long enough for your edge to play out.

How to Implement the 1% Rule Today

Step 1: Calculate Your 1% Dollar Amount

Right now, calculate your 1% number.

Account size: $______ 1% risk: $______

Write this down. Post it where you see it. This is your maximum risk per trade. No exceptions.

Step 2: Create a Position Size Calculator

Set up a simple calculator in Excel/Google Sheets:

Formula: Position Size = (Account × Risk%) ÷ (Entry - Stop)

Step 3: Pre-Calculate Before Every Trade

Before you enter any trade:

1. Check your account balance
2. Calculate your 1% dollar amount
3. Identify your stop loss price
4. Calculate position size
5. Enter only that position size

Never skip this step. Never guess your position size. Calculate it every time.

Step 4: Track Your Position Sizing

Add a column to your trading journal:

Review weekly: Any trades over 1%? Any violations? Fix them immediately.

Step 5: Set Hard Limits

In your trading platform:

Set maximum order size: Configure your platform to reject orders larger than your calculated 1% position size.

Set maximum daily loss: Configure your platform to stop trading if you lose 3% in a day.

Technology > willpower. Use tools to enforce your rules.

Key Takeaways

• The 1% rule: Risk a maximum of 1% of your account balance on any single trade
• Drawdown recovery math is brutal: 50% loss requires 100% gain to recover, 75% loss requires 300% gain
• Calculate position size using: (Account × Risk%) ÷ Stop Loss Distance
• Position size (total investment) can exceed 1%, but risk amount (maximum loss) should be 1%
• Start smaller when learning: 0.25% risk until you prove the strategy works
• Adjust risk based on volatility: Reduce risk when ATR expands, increase when ATR contracts
• Avoid common mistakes: risking based on conviction, increasing size after losses, martingale progressions, averaging down, correlation blindness
• Use advanced techniques carefully: Kelly Criterion (use quarter-Kelly), volatility-adjusted sizing, equity curve adjustments
• Manage portfolio heat: Maximum 3-5% total open risk for conservative, 6-10% for aggressive
• The 1% rule keeps you in the game long enough for your edge to play out
• Pre-calculate position size before every trade using the formula
• Track your position sizing in your journal and review weekly
• Set hard limits in your trading platform to enforce the rule

The best traders don't have better strategies than you. They don't have more talent than you. They have better risk management. They stay in the game. They survive drawdowns. They trade small enough that losses don't trigger emotional decisions. They compound slowly over years.

You can have the best strategy in the world. If your position sizing is wrong, you'll blow up.

You can have a mediocre strategy. If your position sizing is right, you'll survive long enough to improve.

The 1% rule is the difference between gambling and trading.

Between hoping and engineering.

Between blowing up and building wealth.

Risk 1%. No exceptions. Your future self will thank you.

ChartMini automatically calculates optimal position sizes based on your account balance, risk tolerance, and current market volatility—ensuring you never risk more than 1% per trade.