The 1% rule is the foundation of sound risk management. It states that you should never risk more than 1% of your total trading account on any single trade. This simple rule has saved countless traders from blowing up their accounts and is practiced by professionals worldwide.
What is the 1% Rule?
The 1% rule means that if your trade hits its stop loss, you lose no more than 1% of your account value. This is not about position size - it is about maximum potential loss.
The 1% Rule Formula:
Maximum Risk per Trade = Account Balance x 0.01
Example: $50,000 account x 0.01 = $500 maximum risk
Note that 1% risk does not mean 1% position size. If you have a tight stop loss, your position could be 10% or more of your account while only risking 1%.
Why 1% Specifically?
Survive Losing Streaks
Even excellent strategies experience losing streaks. With a 60% win rate, there is a real probability of 8-10 consecutive losses. At 1% risk per trade:
- 10 consecutive losses = 10% drawdown
- 20 consecutive losses = 18% drawdown (because each 1% is from declining balance)
These drawdowns are recoverable. Compare this to risking 5% per trade:
- 10 consecutive losses = 40% drawdown
- 20 consecutive losses = 64% drawdown
Recovering from a 64% drawdown requires a 178% return - nearly impossible.
The Math of Recovery
| Drawdown | Return Needed to Recover |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 30% | 43% |
| 50% | 100% |
| 75% | 300% |
Emotional Stability
A 1% loss feels manageable. You can objectively evaluate what went wrong and learn from it. A 10% loss triggers emotional responses - fear, desperation, the urge to revenge trade. The 1% rule keeps you in a rational state of mind.
Implementing the 1% Rule
Step 1: Calculate Your Risk Amount
At the start of each day or week, determine your 1% number based on current account balance.
- $10,000 account = $100 max risk
- $25,000 account = $250 max risk
- $50,000 account = $500 max risk
- $100,000 account = $1,000 max risk
Step 2: Define Stop Loss Before Entry
Identify where you will exit if wrong. Use technical levels - support, resistance, moving averages - not arbitrary percentages.
Step 3: Calculate Position Size
Divide your risk amount by the stop loss distance:
Example:
- Account: $30,000
- 1% risk: $300
- Stock price: $75
- Stop loss: $72 (risk of $3 per share)
- Position size: $300 / $3 = 100 shares
- Position value: $7,500 (25% of account)
Step 4: Execute with Discipline
Once you enter, honor your stop loss. Moving it wider defeats the entire purpose of the rule.
When to Use Less Than 1%
The 1% rule is a maximum, not a requirement. Consider risking less when:
- You are new: Start with 0.25% or 0.5% while learning
- The setup is uncertain: Not every trade deserves full risk
- You are in a drawdown: Reducing risk during losing periods protects capital
- Market conditions are unusual: High volatility, holidays, or major events
- You have correlated positions: Multiple similar trades should share the 1% budget
Common Objections to the 1% Rule
"It Limits My Profits"
The 1% rule limits risk, not position size or profits. With a good risk-reward setup, you can still make 3% or more on a winning trade while only risking 1%.
"My Account is Too Small"
Small accounts actually need the 1% rule more, not less. A $5,000 account risking 1% ($50) can still make meaningful percentage returns with good setups. Risking more will likely blow the account faster.
"Professional Traders Risk More"
Actually, most professional traders risk less - often 0.25% to 0.5% per trade. They understand that preservation of capital is paramount. Hedge funds with billions still practice strict risk limits.
Monitor Your Risk in Real-Time
Pro Trader Dashboard tracks your risk exposure across all positions, alerting you when you exceed your risk parameters.
The 1% Rule and Account Growth
Compounding Benefits
Because the 1% is calculated on current balance, your dollar risk grows as your account grows. Starting with $10,000:
- Initial: 1% = $100
- Account grows to $15,000: 1% = $150
- Account grows to $25,000: 1% = $250
Your risk amount automatically scales with success.
Drawdown Protection
Conversely, during losing periods, your 1% shrinks:
- $25,000 account: 1% = $250
- Account drops to $20,000: 1% = $200
- Account drops to $15,000: 1% = $150
This automatic reduction protects remaining capital when things are not working.
Summary
The 1% rule is non-negotiable for serious traders. By limiting losses to 1% of your account per trade, you ensure that no single trade can cause significant damage. You can survive long losing streaks, maintain emotional control, and stay in the game long enough for your edge to play out. Calculate your 1% before every trade, define your stop loss, size your position accordingly, and honor your exits. This discipline is what separates profitable traders from those who blow up their accounts.
Learn more: the 2% rule for conservative sizing and understanding maximum drawdown.