Stage 3: Execution and Risk · Module 8: Risk Management and Position Sizing · Lesson 2 of 9 · Back to course
The “1% rule” is one of the most common pieces of risk guidance you’ll come across. The idea is simple: on any single trade, you plan to lose no more than about 1% of your account if your stop-loss is hit.
It’s not a law and it’s not magic. It’s a sensible starting point that keeps any single loss small enough to shrug off. This lesson explains how it works, how to turn it into pounds, and how to choose a figure that suits you.
What you’ll learn
- What “risk” actually means in the 1% rule
- How to work out your risk in pounds
- Why a percentage works better than a fixed amount
- How to choose your own figure (0.5%, 1% or something else)
- What to do when your account is too small for the minimum trade size
What “risk” means here
In this rule, your risk is the amount you’d lose if the trade hits your stop-loss. It is not:
- the size of the position (a £10-a-point bet on an index is a much bigger position than £10)
- the margin your broker holds
- the amount you hope to make
So “1% risk” on a £5,000 account means: if my stop is hit, I lose about £50. The position itself might be worth thousands of pounds of exposure. What matters is the distance to your stop and the size you choose – which is exactly what position sizing works out in the next lesson.
Working it out in pounds
The maths is just: account balance × risk %.
| Account | 0.5% risk | 1% risk | 2% risk |
|---|---|---|---|
| £1,000 | £5 | £10 | £20 |
| £2,500 | £12.50 | £25 | £50 |
| £5,000 | £25 | £50 | £100 |
| £10,000 | £50 | £100 | £200 |
Write your number down before you trade. If you only work it out after you’ve already decided how big you “feel like” going, it isn’t a rule.
Include costs if they’re meaningful. If the spread or commission on a trade is a noticeable chunk of your risk – common with small stops – count it as part of the loss. A £25 planned loss plus £4 of spread is really £29.
Why a percentage beats a fixed amount
You could just decide “I’ll risk £50 a trade”. The problem shows up during a bad run. A percentage automatically shrinks your size as your account falls, and grows it slowly as the account rises.
Example (illustrative): you start with £5,000 and risk 1% of your current balance.
- Trade 1 risks £50. It loses. Balance £4,950.
- Trade 2 risks £49.50. It loses. Balance £4,900.50.
- After ten losses in a row, you’re risking about £45 a trade instead of £50, and the account is down about 9.6%.
With a fixed £50, ten losses would cost £500 – 10% – and you’d still be risking £50 from a smaller pot. The difference is small at 1%, but at bigger risk sizes the automatic slowing-down matters a lot.
Some traders update the figure every trade; others update it weekly or monthly to keep things simple. Either is fine, as long as you update it when your balance falls, not just when it rises.
Choosing a figure you can live with
1% is a common starting point, but the right number is personal. Three tests help:
1. The losing-streak test. Multiply your risk by ten. With a 40% win rate, a streak of eight or more losses within 100 trades is roughly a coin-flip (see Lesson 8.1). Could you handle that drop calmly and keep following your plan? At 1% it’s about 10%. At 3% it’s about 26%.
2. The sleep test. If a single losing trade at this size would ruin your evening, the size is too big. Emotional pressure leads to moving stops and revenge trading.
3. The rules test. If you’re practising for a prop challenge, the rules may force you smaller. A 5% daily loss limit leaves little room at 2% a trade. Many people preparing for challenges use 0.25–1% – see risk per trade for a prop challenge.
A sensible approach for beginners is to start at 0.5–1% while you learn, and only consider changing it after you have a decent number of trades in your journal – at least 50, ideally 100 – that show you’re following your plan.
When to cut your risk
It’s worth deciding in advance when you’ll go smaller. For example:
- After a set drawdown: “If my account falls 5% from its peak, I halve my risk until I’m back within 2% of the peak.”
- After a rule break: “If I break a rule, I trade at half size for the next ten trades.”
- In unusual conditions: major news, holiday markets or a new instrument you haven’t traded before.
You’ll set up the full version of these in Lesson 8.9, daily and weekly loss limits.
What not to do: increase size after losses to “win it back”. Doubling up after a loss (sometimes called a martingale) can work for a while and then destroy an account in one bad streak.
When the account is too small for the minimum size
Brokers set a minimum trade size, for example a minimum stake per point on a spread bet or a minimum of 0.01 lots on a CFD. With a small account, 1% might be smaller than that.
Example (illustrative): £1,000 account, 1% risk = £10. Your setup on an index needs a 40-point stop. £10 ÷ 40 = £0.25 a point. If the minimum stake is £0.50 a point, the smallest possible trade risks £20 – that’s 2%.
Your honest options are:
- Skip the trade, and look for setups with a stop distance that fits.
- Use an instrument or account type that allows smaller sizes (see spread betting vs CFDs).
- Keep practising on demo while you save more capital.
What you shouldn’t do is tighten the stop just to make the size fit. Your stop belongs where the trade idea is proved wrong, not where the maths is convenient.
Key takeaways
- The 1% rule means you plan to lose about 1% of your account if your stop is hit – it’s about the loss, not the position size.
- Work it out in pounds before every trade: balance × risk %.
- A percentage shrinks your size automatically in a drawdown.
- Choose a number using the losing-streak, sleep and rules tests. 0.5–1% is a common starting point for learners.
- Decide in advance when you’ll cut risk, and never increase size to chase losses.
Quick check
- Your account is £3,200. What’s 1% risk?
- True or false: “1% risk” means your position is worth 1% of your account.
- Your size doesn’t fit because of a minimum stake. Should you tighten your stop?
Answers: 1) £32. 2) False – it’s the amount you’d lose if your stop is hit. 3) No – skip the trade, use a smaller-size product, or stay on demo.
FAQs
Is 1% too cautious? For someone still learning, rarely. The aim early on is to build a record of following your plan, not to make your account grow fast. Many experienced traders use 1% or less too.
Should I use my balance or my equity? Your balance is simpler. If you often have several trades open, using equity (balance plus or minus open profit and loss) is more conservative when trades are losing.
Does 1% per trade mean I can only lose 1% a day? No. Five trades at 1% can lose 5%. That’s why you also need a daily limit – see Lesson 8.9.
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.