1% rule

The 1% rule is a risk management principle stating that a trader should risk no more than 1% of their total trading capital on any single trade. This is achieved by calculating the appropriate position size based on the stop-loss distance and the 1% risk threshold. For example, if an account has $10,000, the maximum loss on one trade is $100.

For a retail trader, consistently applying the 1% rule prevents substantial capital depletion from a few losing trades. It encourages disciplined position sizing, ensuring that even a streak of losses does not wipe out a significant portion of the account. This rule directly addresses overtrading and uncontrolled risk exposure, fostering long-term capital preservation and reducing the probability of ruin.