The 1% rule
Risk no more than 1% of your account on any single trade (0.5–2% is a common range). On a $10,000 account, 1% is $100. That is the amount you lose if your stop is hit, not the size of the position. At 1% risk, even ten losses in a row leave you with about 90% of your capital.
The position sizing formula
Example: $10,000 × 1% = $100 risk. Entry $50, stop $47.50, so $2.50 risk per share. $100 ÷ $2.50 = 40 shares ($2,000 position).
Use our free position size calculator to do this for any stock or crypto trade.
Where to place a stop loss
- Structure stops: below support for longs or above resistance for shorts, the level where your idea is proven wrong.
- Volatility stops: a multiple of ATR (for example 1.5–2× ATR) beyond entry, so normal noise does not stop you out.
- Never place a stop based only on how much you want to lose. Pick the logical stop first, then adjust position size.
- Avoid obvious round numbers where many stops cluster.
Risk-reward ratio
Risk-reward compares potential profit to potential loss. With 1:2 risk-reward, you only need to win more than 33% of trades to break even before costs.
| Risk : reward | Break-even win rate |
|---|---|
| 1 : 1 | 50% |
| 1 : 1.5 | 40% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25% |
Drawdown recovery math
| Loss | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |
Losses compound against you. Keeping drawdowns small is far easier than recovering from big ones.
Leverage and margin
Leverage lets you control a larger position than your cash, but it does not change the correct position size. Size from your stop and risk %, then check whether leverage is even needed. High leverage shrinks the distance to liquidation, and on crypto perpetuals a sudden wick can liquidate you even if price recovers.
Portfolio-level risk
- Correlation: five long altcoin positions are close to one big crypto bet. The same goes for five tech stocks.
- Total open risk: cap the combined risk of all open trades (for example 5–6%).
- Daily and weekly loss limits: stop trading after losing, say, 3% in a day or 6% in a week.
- Scale down in drawdowns: halve risk per trade after a 10% drawdown until you recover.
Frequently asked questions
What is the 1% rule in trading?
It means risking no more than 1% of your account balance on a single trade, measured as the loss if your stop is hit.
Should I always use a stop loss?
Most traders should. A stop defines your risk in advance. Without one, a single bad trade can do serious damage.
What risk-reward ratio should I aim for?
Many swing traders target at least 1:2, but the right ratio depends on your strategy's win rate. Both together determine expectancy.
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