Risk per trade: the 1% rule and position sizing
Learning objectives
Explain what risking a fixed percentage per trade means and what different percentages survive
Calculate a position size from your account balance, your risk percentage and your stop distance
Recognise why position size is an output of the calculation rather than a decision you make first
The rule in one sentence
Decide in advance what percentage of your account you'll risk on any single trade, and never exceed it.
That's it. The percentage is usually small. One percent is the convention most commonly quoted, which is where the lesson title comes from, though the number matters less than the fact of having one.
Note what the rule doesn't say. It says nothing about how many lots to trade. Lot size isn't something you choose, it's something you calculate, and the calculation comes last.
Why 1%, and what other numbers actually mean
There's nothing sacred about 1%. It's a convention, not a law, and no regulator or textbook makes it binding. What makes it a sensible default is what it survives.
Consider a run of ten consecutive losses, which as lesson 1 explained is unusual but entirely possible:
- At 1% per trade, ten losses leaves you down about 10%. Uncomfortable. Recoverable. You're still trading.
- At 5% per trade, ten losses leaves you down about 40%. You now need a 67% gain to get back to level.
- At 10% per trade, ten losses leaves you down about 65%. You need to nearly triple the remaining account to recover.
Same losing run. Same method. Wildly different outcomes, and the difference is a single number chosen before any of it happened.
The other quiet advantage of a percentage rule is that it's self-adjusting. Risk 1% of a shrinking account and your position sizes shrink automatically. The brake applies itself hardest exactly when you need it most.
The calculation
Three inputs, one output.
Step 1. What am I risking, in money?
Account balance × risk percentage = risk amount
Step 2. How far away is my stop?
Measured in pips or points, from lesson F2.2. This comes from the chart, not from what you'd like it to be.
Step 3. What's the position size?
Risk amount ÷ (stop distance × value per pip for one unit of size) = position size
Example: Anna has $500 and risks 1% per trade.
Step 1. $500 × 1% = $5 at risk.
Step 2. She's trading EUR/USD. Her invalidation level sits 25 pips below her entry, so that's her stop distance.
Step 3. On 0.01 lots of EUR/USD, one pip is worth about $0.10. So a 25-pip loss on 0.01 lots costs $2.50.
$5 ÷ $2.50 = 2
Two units of 0.01 lots, so her position is 0.02 lots.
Check it: 0.02 lots means about $0.20 per pip. A 25-pip stop-out costs $5, which is 1% of her account. Correct.
Now change one input. Suppose the chart puts her invalidation 50 pips away instead.
$5 ÷ (50 × $0.10) = 1
Her position is now 0.01 lots. Same account, same risk, same trade idea. A wider stop means a smaller position, automatically.
That relationship is the whole point. A wider stop does not mean a bigger loss. It means a smaller position.
Position size is an output
This is where most beginners get the process backwards.
The instinct is to decide the position size first, based on what feels right or what the balance allows, then place a stop somewhere convenient. That makes the loss whatever it happens to be, which is another way of saying you haven't controlled it.
The correct order:
- Find the trade.
- Place the stop where the idea is invalidated.
- Calculate the size that makes the loss equal to your fixed percentage.
- Check the margin (lesson 7) and confirm you can open it with free margin left over.
Position size is the answer to a sum, not a preference. If the sum returns a size you find disappointingly small, the sum is not the problem.
The small account problem
With $500 and 1% risk, you have $5 to work with. On EUR/USD at the minimum size most brokers offer, that supports a stop of about 50 pips. Anything wider and the calculation asks for less than the minimum tradeable size.
Which leaves three options, and only two of them are sensible: trade instruments and timeframes where a 50-pip stop is appropriate, accept a slightly higher risk percentage as a considered decision, or fund the account further when you can.
The option that isn't sensible is keeping the position size and abandoning the stop distance, which converts a sizing problem into an uncontrolled loss.
Small accounts are genuinely harder to trade, and the reason is arithmetic rather than skill. It's better to know that at the start than to discover it by ignoring it.
Key takeaways
Decide a fixed percentage of your account to risk per trade and never exceed it. The number matters less than having one and holding to it
Position size is calculated from your risk amount and your stop distance. It is the output of the process, not the first decision
A wider stop means a smaller position, not a bigger loss. The two adjust against each other to keep the risk constant
Percentage-based risk shrinks your position sizes automatically as the account shrinks, applying the brake hardest when you most need it