Lessons › Why traders lose › The 1% rule
World 11 · Why traders lose · lesson 11 · level 2
The 1% rule
Risk 1% of your account per trade, so even ten losses in a row leave about 90% of it.
In one line
Picture ten losing trades in a row. One rule decides if that leaves you about 90% of your account, or about a third.
Explained simply
Risk is the money you lose if your stop, the price where you give up, is hit. It is not the size of the trade. The 1% rule says: risk 1% of your account on each trade. On an example $10,000, that is $100. Lose ten in a row at 1% each, and you still have 90.4%, because each loss is 1% of what is left. At 10% each, only 34.9% is left, and it would have to almost triple to get back. So decide the dollars first, then set the stop, then size the trade.
A worked example
An example $10,000 account, risking 1%: $100 per trade. Ten losses in a row, each 1% of what is left: 0.99 multiplied ten times = 90.4% left. At 10% each: 0.90 multiplied ten times = 34.9% left, and 100 ÷ 34.9 = 2.87, so it must almost triple to get back.
Mistakes to avoid
- Confusing risk with trade size: risk is what you lose if the stop is hit.
- Risking 10% a trade because one loss feels small: ten in a row leave 34.9%.
- Picking the size first and squeezing the stop to fit.
- Expecting the rule to pick winners: it only keeps you around long enough to learn.
Check yourself
In the 1% rule, what is "risk"?
What you lose if your stop is hit. Risk is the money you lose if your stop, the price where you give up, is hit. The trade itself can be much bigger.
You risk 1% per trade and lose ten in a row. About how much of the account is left?
90.4%. Each loss is 1% of what is left, so 90.4% remains. Risking 10% each would leave only 34.9%.
An example $10,000 account risks 1%, and the stop is $2 from the entry. How many units fit that risk?
50 units. 1% of $10,000 is $100, and $100 ÷ $2 = 50 units. If the stop is hit, you lose $100, before fees.
Which order does the 1% rule use to plan a trade?
Dollars you can lose, then the stop, then the size. Work backwards: decide the dollars you can lose, set your stop, then size the trade to fit.
After ten losses at 10% each, 34.9% of the account is left. How much must that grow to get back to the start?
Almost triple: 2.87 times. 100 ÷ 34.9 = 2.87, a gain of about 187%. At 1% risk, the same streak would have left 90.4%.
Goal of this lesson: Turn 1% of your account into dollars, and plan a trade in order: dollars, stop, size.