Risk Management Basics: The 1% Rule That Keeps You Alive
Position sizing and stop placement explained so simply you can apply it today.
· 5 min read · risk, position-sizing, basics
Risk management is the entire job. Entry signals, indicators, patterns — they matter only if you survive long enough for the edge to compound. Most traders blow up not because they cannot predict, but because they cannot size.
Bar comparison showing that a 10% drawdown needs 11% to recover, 25% needs 33%, 50% needs 100%, and 75% needs 300%. Deeper drawdowns require disproportionately larger recoveries.
The 1% rule
Never risk more than 1% of your total account on any single trade. On a $10,000 account, maximum loss per trade is $100. This sounds conservative until you realize: 10 losers in a row drops you 10%, not 50%. You stay alive, the edge compounds, you survive bad streaks.
How to calculate position size
Position size = (account size × 1%) ÷ (entry price − stop price). Example: $10,000 account, $100 max risk, stock at $50, stop at $48. Position size = $100 / ($50 − $48) = 50 shares. The math does not care about the stock price; it cares about the distance to your stop.
Setting the stop first
Beginners set position size first, then place the stop wherever is 'comfortable.' Wrong order. The stop is a structural decision — it goes where your setup is invalidated (below support, above resistance, beyond ATR). Position size adapts to the stop, never the reverse.
The drawdown math
Lose 10%, need 11% to recover. Lose 25%, need 33%. Lose 50%, need 100%. Lose 75%, need 300%. The deeper the drawdown, the more impossible the recovery. The 1% rule exists because it makes a 20% drawdown virtually impossible in any normal streak.
Risk-to-reward ratio
Every setup should offer at least 2R (two times your risk) in potential reward. With 2R setups you can win only 40% of the time and still be profitable. With 1R setups you need 60%+ to break even. Hunt for good ratios, not just good setups.