The 1% Rule in Trading: How It Works, When It Fails, and Better Alternatives
Learn the 1% rule in trading, how to apply it with position sizing, and when to use 0.5% or fixed-R rules instead. Includes examples.
The 1% rule says you should risk no more than 1% of your account on any single trade. It is simple, and for many traders it prevents the early blow-ups that end accounts.
Why the rule works
Losing streaks are normal. At 1% risk, a 10-loss streak is about a 10% drawdown before compounding. Painful, but recoverable.
How to apply it correctly
- Calculate account size.
- Set risk to 1%.
- Choose a stop based on invalidation.
- Size the position using the stop distance.
The stop defines the position size, not confidence.
When 1% is too high
Lower risk when:
- You are new to execution.
- Your strategy is not proven.
- Volatility is unusually high.
- You are stacking correlated trades.
Many profitable traders use 0.25% to 0.75%.
Better alternatives
- Fixed-R: risk a fixed dollar amount each trade.
- Volatility-adjusted: risk less when volatility expands.
- Daily loss limits: stop trading after -2R or -3R.