Risk per trade: the 1% rule explained

Ask experienced traders what kept them in the game and many will say the same thing: they never risked much on a single trade. A common starting point is the 1% rule.

The rule

On any one trade, risk no more than 1% of your account. Risk means the money you lose if your stop loss is hit, not the size of the position.

With a 500 dollar account, 1% is 5 dollars. If your stop loss is 20 pips away, you size the trade so 20 pips equals 5 dollars, which is about 0.025 lots on EUR/USD.

Why it works

Even a good trading plan has losing streaks. Ten losses in a row at 1% risk leaves you with about 90% of your account. Ten losses at 10% risk leaves you with about 35%, and you now need to nearly triple your money just to get back to where you started.

Small risk keeps you in the market long enough for your skill to matter.

How to apply it

1. Decide where your stop loss goes based on the chart, not on how much you want to risk.
2. Measure the distance in pips.
3. Work out the lot size that makes that distance equal 1% of your account.
4. If the lot size is smaller than your broker allows, skip the trade.

Step 1 matters. Moving your stop closer just to trade bigger is how the rule gets broken.

Trading involves risk. This article is education, not financial advice.