Risk Management for Trading: The 1% Rule, Stop-Losses and Position Sizing
Most traders who blow up their account were not wrong about the market. They were right often enough but lost too much on the trades that went against them. Risk management is the part of trading you fully control, and it matters more than any entry signal.
The 1% rule
Decide in advance the most you will lose on any single trade, as a share of your account. Professionals typically use 0.5% to 2%. At 1%, ten losing trades in a row costs you about 10% of your account: painful, but survivable. At 10% per trade, the same losing streak wipes out two-thirds of it.
Losses also compound against you: after a 50% loss you need a 100% gain just to get back to where you started.
Set the stop-loss before you enter
Your stop-loss is the price at which your trade idea is proven wrong, for example just below a support level or below a recent swing low. Place it where the chart says you are wrong, not where it feels comfortable. Then never move it further away once the trade is open.
Size the position from the stop
Position size = money you are willing to risk ÷ distance to your stop. This is the step most beginners skip. The stop decides the size, not the other way round.
- Account: $10,000. Risk 1% = $100.
- Entry $50, stop $47.50 → risk per unit $2.50.
- Position size = $100 ÷ $2.50 = 40 units ($2,000 position).
Only take trades worth the risk
Compare what you could gain with what you could lose. With a reward-to-risk ratio of 2:1 you can be right only 40% of the time and still make money. Below 1:1 you need to be right most of the time, which few people manage.
Cap your total exposure
Several trades in coins or stocks that move together are really one big trade. Keep the total open risk across all positions to something like 5-6% of the account, and be careful with leverage: it multiplies losses exactly as much as gains.
Common mistakes
- Choosing the position size first and the stop afterwards
- Moving the stop further away to "give the trade room"
- Risking more after a loss to win it back
- Ignoring fees and slippage on small accounts
Free tools for this strategy
Position size calculator · Risk/reward calculator · Margin & leverage calculator
Open the Position size calculator →Frequently asked questions
How much should I risk per trade?
Most professionals risk between 0.5% and 2% of their account per trade. Beginners are safest at 1% or less until they have a track record.
Is a stop-loss always necessary?
For active trading, yes. Without a predefined exit, a normal loss can turn into a large one. Long-term investors often use position size and diversification instead of stops.