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The 1% Rule in Trading: Does It Still Make Sense?

The 1% rule says to risk no more than 1% of your account per trade. Learn the math behind it, when 2% or 0.5% may fit better, and how it protects you from ruin.

By the TradeThink team3 min read

The 1% Rule in Trading: Does It Still Make Sense?

The 1% rule is simple: never risk more than 1% of your account on a single trade. If the stop is hit, you lose at most 1%. It is one of the most widely quoted rules in trading, and for good reason.

Why small risk per trade works

Losing streaks are inevitable. See handling a losing streak. The question is how much a streak costs you.

Consecutive losses Account left at 1% risk at 2% risk at 5% risk at 10% risk
5 95.1% 90.4% 77.4% 59.0%
10 90.4% 81.7% 59.9% 34.9%
20 81.8% 66.8% 35.8% 12.2%

At 1%, even 20 losses in a row leaves most of the account intact. At 10%, you are close to finished. And remember that recovering from a drawdown takes a larger percentage gain than the loss: a 50% loss needs a 100% gain to get back. See max drawdown and recovery.

The same sequence of trades at four risk levels. Higher risk magnifies both the gains and the drawdowns.
The same sequence of trades at four risk levels. Higher risk magnifies both the gains and the drawdowns.

1% of what?

The rule is about risk, not position size. With a $50,000 account, 1% is $500 of risk. With a stop $1 away, that is 500 shares, a position worth far more than 1% of the account. The position sizing guide shows the formula.

When to use more or less

0.25% to 0.5% suits:

  • New traders still learning their strategy.
  • High-frequency day traders who take many trades per day.
  • Strategies with low win rates and long losing streaks.
  • Periods of drawdown, as a way to slow the damage.

Up to 2% is sometimes used by experienced traders with a proven, well-measured edge and few trades. Going much higher than that greatly raises the risk of ruin.

Is 1% optimal?

Not necessarily. The Kelly criterion gives a mathematically optimal fraction for maximum long-term growth, given your win rate and payoff. In practice, Kelly fractions are often much larger than 1% and lead to very deep drawdowns, so most traders use a small fraction of Kelly, which often ends up in the same 0.5% to 2% range.

Adjust with the account

Recalculate your 1% as the account changes, for example once a week or once a month. Risk shrinks during drawdowns and grows with profits automatically.

Check your consistency

The rule only works if you follow it. Look at your losses in R: if many losing trades are 2R, 3R or worse, your real risk is much higher than 1%. In TradeThink, R-multiples are calculated for every trade and shown in the reports. The free Kelly's Simulator lets you see how different risk levels play out over many trades.

More on risk management