The 1% risk rule means that you do not risk more than 1% of the account capital on a single trade. This does not mean that you only put 1% of your capital into a trade. Bet as much capital as you want, but if the trade loses more than 1% of your total capital, you should close the position. To risk 1% or less per risk trading is the standard for most professional traders.
For day traders and swing traders, the 1% risk rule means using as much capital as necessary to initiate a trade, but yourstop tabplacement protects you from losing more than 1% of your account if the trade goes against you. Whether you use a stop loss or not is up to you, but the 1% risk rule means you won't lose more than 1% of your capital on a single trade.
If you allow yourself to risk 2%, then that would be the 2% rule. If you're only risking 0.5%, then that's the 0.5% rule. The concept is the same regardless of the exact percentage chosen: manage your risk and limit losses on each individual trade to a small percentage of the account.
Why use the 1% risk rule?
Losing trades will happen and if left unchecked, even one losing trade allowed to execute can decimate an account. The 1% risk rule prevents a loss from getting out of hand. According to the rule, it takes many losing trades in a row to damage the account.
Even if the risk is kept under control and at 1% per trade,high returns are still possible. So you won't lose if you follow this rule. In fact, it is necessary to follow such a rule if you want to get good returns.consistent, because controlling losses and keeping them small is an important part of successful trading. The second element is creating a strategy that is beneficialreward: riskso your winning trades are greater than your losses. You risk 1% of your account per trade, but your winning trades add, for example, 3%, 5% or 10% to your account.
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Example of the 1% risk rule in action
Take 1% of your account assets. This is how much you can lose on a single trade.
As your account assets change, the amount you can risk also changes.
For day trading I use 1% of my daily starting capital, and that is the amount I risk per day trading all day. This way I don't have to recalculate every time I day trade. The next day my risk per trade will be slightly different.
For swing trading you need 1% of your current assets.
Let's say your account equity is $10,560. It doesn't matter if you shopstocks, forex or futures, the process is the same.
1.1% of the bill is $105.60 (0.01 x 10,560). Round it up to $105 or $106. That's how much you can lose per trade. We call this dollar amount theAccount risk.
2.Then determine how much capital you want to put into the trade based on the account risk and oursStop loss size. The size of the stop-loss is the difference between the entry price and the stop-loss price.
Let's say you enter a stock at $125.35 and place a stop loss at $119.90. The stop loss size is $5.45. This means that if your stop loss is reached, you will lose €5.45 for each share you own.
3.You can lose €105.60, so divide that by €5.45.
Accountrisico ($) / Stop-lossgrootte= 105.60 / 5.45 = 19.37 shares or 19 shares.
19 shares cost: 19 x $125.35 = $2,381.65...that's a lot more than 1% of the 10K account (which is about 1/4 of the account in this case), but the trade only risks 1% of the account's equity.
Do the calculations backwards to ensure you have the correct position size and that your risk is only 1%.
If you buy 19 shares and lose $5.45 on each share, you will lose $103.55.
Your account equity is €10,560 and you are allowed to lose 1% of that, which is €105.60. Therefore, your potential loss on the trade falls within your 1% risk rule. Read more stock item size iHow many shares to buy.
Forexand futures work the same way, except you have to know it toopip valuefor forex or the tick/point value for futures. Read all about determining currency positionsMethods of determining forex positions.
As a side note, regardless of the size of my stop loss, I ONLY trade if I expect to make at least 2.5 times the amount I am risking. For example, if my stop loss size is $1, I will only take the trade if I reasonably expect the price to reach a target $2.50 or more above my entry.
For day trading I use 2 to 2.5x, for swing trading I generally look for more than 3x. For more information on setting profit targets and collecting larger profits relative to losses, seeHow to Set Profit Targets in Stock Trading.
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Understand the 1% risk rule to apply it to your trading
The 1% risk rule is about controlling the size of losses and limiting them to a fraction of the bill.
But to do this, you need to determine a starting point (the stop-loss location) before trading, and also establish the right position size so that if the stop-loss is hit, only 1% of the account is lost.
It may seem like a lot of work, but there are big rewards:
- Major losses will be extremely rare. The price can still jump through a stop loss, resulting in a larger than expected loss. But even without a stop loss, you would still face the loss. The occasional trade that gets stopped and then moves in the direction you expect is a small price to pay for controlling the risk on ALL trades; you can always re-enter if necessary.
- To risk 1% per risk Trading can even be extremely profitable with a favorable reward:risk ratio. A losing trade costs 1%, but winning trades add 2.5%, 4% or even 10% or more to your account balance. This has nothing to do with how far the asset moves in percentage terms, and everything to do with position size and your reward for risk.
Does the 1% risk rule apply to investors?
I'm holding onlong-term investments that are buy-and-hold. I do not use the 1% risk for this because I do not use a stop loss.
Instead, when investing, I only put a certain percentage of my account into each asset, typically about 2% to 5% forindividual investment shares, and 10% to 20% forindex-ETF's. I choose a handful of index funds and decide what percentage of my account to allocate to each fund.
The more niche the index ETF is, the less capital I give to it. The more diversified the fund is, the more capital I give to it. For example, I might allocate 10-15% of my account to a technology fund, while an S&P 500 ETF might get 30%. For example, an individual share can receive only 2% to 5% of the capital.
If I buy index funds, there is very little risk of any of these investments going to zero. But at the same time, I would like to diversify my capital if something were to happen, especially with individual stocks.
Even if a stock plummets to zero, I still only lose a small percentage of my account. But I don't use stop-losses to further manage risk because these are long-term positions and I don't want to waste time or expense entering and exiting positions. That said, individual stocks allow me to get out of a position if the reason I bought the company is gone (they are no longergrow, for example).
I also like this approach because it diversifies my strategies. When I day trade and swing trade, I capture short-term price movements and move in and out of the market. With this investment account I stay invested and benefit from long-term trends that make money almost effortlessly.
Frequently Asked Questions
What is the formula for the 1% risk rule?
- Calculate the account risk in dollars, which is 1% of the account assets.
- Calculate the stop-loss size for a given trade. This is the difference between the entry price and the stop-loss order price.
- Calculate the position size: Account risk ($) / Stop Loss size = Position size in shares/lots
- To check your math, multiply your position size by the stop loss size. This must be equal to or less than 1% of your account assets.
What is the maximum risk I take per trade?
When day trading or swing trading, you should not risk more than 1% of the account capital. Risk maximum 2%. Most professionals risk 1% or less.
What is the 2% risk rule?
According to this rule, the trader does not lose more than 2% of his account equity on a single trade. For example, on a $10,000 account, you close a trade with a loss of $200 or closer (0.02 x $10,000).
Can I risk 5% per trade?
It is usually only traders with small accounts or a lack of experience who are willing to risk 5% per share trading. The lack of experience or capital can be costly, as losing even several trades in a row can quickly deplete the account. When starting out, it is better to risk 0.5% or even 0.25% per trade. If you see consistent gains over several months, move up to 1% per year. trade. There is plenty of profit potential with a 1% risk. There is little reason to risk 5% per trade.
AF Cory Mitchell, CMT
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Disclaimer: Nothing in this article is personal investment advice or advice to buy or sell anything. Trading is risky and can result in significant losses, even more than deposited, if you use leverage.
