Position Sizing: How the 1% Rule Keeps You in the Game
Most blown accounts are not caused by bad entries. They are caused by bad sizing. Here is the simple math that fixes it.
Ask ten traders why they lost money last year and most will talk about entries: wrong setup, wrong timing, wrong market. Very few will say the honest answer: they were too big.
Position sizing is the least exciting part of trading and the one that decides whether you survive long enough for your edge to show up.
The rule in one line
Never risk more than 1% of your account on a single trade.
“Risk” here does not mean position size. It means the amount you lose if your stop is hit. A $5,000 position with a tight stop can risk less than a $1,000 position with a wide one.
The formula
Shares = (Account × Risk %) ÷ (Entry − Stop)Say your account is $10,000 and you risk 1%, so the most you can lose on this trade is $100.
You want to buy at $50 with a stop at $48. That is $2 of risk per share.
| Input | Value |
|---|---|
| Account | $10,000 |
| Max risk (1%) | $100 |
| Entry | $50.00 |
| Stop | $48.00 |
| Risk per share | $2.00 |
| Position size | 50 shares ($2,500) |
If the stop is hit, you lose $100, which is 1% of the account. That’s annoying but survivable.
Why 1% and not 5%?
Because losing streaks are normal. Even a solid strategy will string together eight or ten losers at some point. Here is what ten straight losses do to an account at different risk levels:
| Risk per trade | Account after 10 losses |
|---|---|
| 1% | −9.6% |
| 2% | −18.3% |
| 5% | −40.1% |
| 10% | −65.1% |
And the deeper the hole, the harder the climb out:
| Drawdown | Gain needed to recover |
|---|---|
| −10% | +11.1% |
| −20% | +25.0% |
| −30% | +42.9% |
| −50% | +100.0% |
At 1% risk, a brutal streak is a bad month. At 5%, it is a rebuild.
Common mistakes
- Sizing by gut. “This one feels strong, I’ll go bigger.” Conviction is not a risk model.
- Moving the stop to avoid the loss. This silently turns a 1% trade into a 3% trade.
- Ignoring slippage and gaps. Overnight gaps can jump straight past your stop. On gap-prone names, size down.
- Forgetting correlation. Five long positions in the same sector is closer to one big trade than five small ones.
Make it automatic
Put the formula in a spreadsheet or your platform’s position calculator and use it on every trade, before you click buy. Sizing should be a calculation, not a decision.
Your edge comes from your strategy. Your survival comes from sizing. You need both, and only one of them is fully in your control.