Risk management is what separates the traders who survive from those who lose their account. The best known and most effective rule for beginners is the 1 percent rule, and in this guide we explain how to apply it.
What the 1 percent rule consists of
The rule says you should never risk more than 1 percent of your capital on a single trade. If your account is 1,000 dollars, your maximum loss per trade would be 10 dollars. This way, even a streak of several losses in a row barely affects your account.
How to apply it step by step
- Calculate 1 percent of your capital: that is your maximum loss per trade.
- Define the distance of your stop loss in pips according to your strategy.
- Adjust the lot size so that, if the stop loss is hit, the loss equals that 1 percent.
Why it works: with this rule you would need a huge number of consecutive losses to ruin your account, which is very unlikely if you have a strategy with an edge. It gives you room to learn and for your winning trades to compensate the losing ones.
Final tip: you can use a position size calculator to automate this calculation on each trade and never make a mistake with the lot size.
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