Davinchu-Blog

The 1% rule: how much to risk per trade and why

What the 1% rule in trading is, how to apply it to position size, what losing streaks do at 1, 2 and 5% risk, when 1% is too much or too little and how to stick to it.

Dieser Artikel ist noch nicht in Ihre Sprache übersetzt — unten die Version auf: Englisch.

In short. The 1% rule means risking no more than 1% of the account on one trade: if the stop is hit, you lose at most one percent. It is not about the position size but about how much you can lose; the size follows from the stop. The point is to survive the inevitable losing streaks without a deep drawdown.

How to apply it

  1. 1% of the balance is your risk amount: with $10,000 that is $100.
  2. The stop goes on the chart — where the trade idea is invalidated.
  3. Size = risk / (stop in pips × pip value per lot). With a 20-pip stop on EURUSD that is 0.5 lots, with a 50-pip stop 0.2 lots. Use the lot size calculator; examples for yen pairs, crosses and gold are in «How to calculate lot size».

Why 1%

Ten losses in a row at 1% of the current balance is a 9.56% drawdown, at 2% — 18.29%, at 5% — 40.13%. The first is easy to recover; the last needs a 67% gain. Check your own streak in the drawdown calculator; why the recovery grows faster than the drawdown is explained in «How to calculate account drawdown».

50%60%70%80%90%100%012345678910Balance vs the start of the streakLosses in a row−9.56%−18.29%−40.13%Risk 1%Risk 2%Risk 5%
Risk is taken from the current balance, so each next loss is a little smaller than the last. Still, a streak at 5% takes the account down 40.13%, and getting back needs a 67% gain; at 1% the same streak costs under 10%.

Risk of ruin tells the same story. A strategy with a 45% win rate and wins 1.5 times the losses reaches a 30% drawdown within 500 trades in 2% of cases at 1% risk and in almost half the cases (48.9%) at 2% risk — a Monte Carlo model from the risk of ruin calculator, not a forecast.

When 1% is too much and when it is too little

  • Prop account. With a 5% daily limit and 1% risk, five losses in a row end the day, and a 10% overall limit takes about ten. Many prop traders risk 0.5% or less. More in «Prop firm risk management».
  • Several trades at once. Three open positions of 1% in correlated pairs are almost 3% at risk on one market move.
  • Small account. With $500 and a 20-pip stop, 1% is $5, i.e. 0.025 lots, while the broker allows 0.02 or 0.03. Round down.
  • A proven strategy with a long history sometimes justifies more than 1%, but decide from your own statistics, not from a feeling.

Current or starting balance

If 1% is taken from the current balance, the risk shrinks with a drawdown and grows with profit. If from the starting balance, every trade costs the same and the drawdown grows faster. The first is gentler on losing streaks, the second is simpler to calculate.

How Davinchu helps you stick to the rule

The rule usually breaks not on the math but on emotions: after a losing streak you want to win it back with a bigger size. In Davinchu the MetaTrader 5 risk manager — the T-Manager EA (the MT4 version is in development) — sizes positions on its panel from risk in money or percent, and the dashboard rule «Risk per trade, % (max)» blocks panel entries without a stop loss or with risk above the limit. More on the «MT5 risk manager» page. If you are just starting out, the journal, calculators and mistake review are on the «Davinchu for beginner traders» page.