MoneyPlanIt

Lesson 01 · Risk management

Position Sizing and the 1% Rule in Trading

  • 13 short cards
  • About 6 min to read
  • 5 quiz levels · 30 questions
  • Beginner

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Overview

Position sizing means deciding how much to buy or sell on each trade. The 1% rule is the simplest method: never risk more than a small, fixed share of your account, such as 1%, on any one trade. It keeps each loss small enough to survive.

Timeframe
Any timeframe
Markets
All markets
Difficulty
Beginner

Builds on: Trading for Beginners: The Basics

Try it yourself

Position size calculator

Try changing the numbers. The example uses a £12,000 account, 1% risk, a buy at £2.50 and a stop loss at £2.38. Leave “value of a 1.00 price move” at 1 when the prices are in pounds.

How the 1% rule works

Before you trade, decide the most you will lose if your stop loss is hit. With the 1% rule, that is 1% of your account. On a £10,000 account, that is £100.

Then work out how much to buy so that hitting the stop loses about that amount. The method is called fixed fractional position sizing, because you risk a fixed fraction of your account every time1.

Position size = money you will risk ÷ distance from entry to stop loss.

The 1% rule in three steps

  1. Money you’ll risk£10,000 account × 1% = £100
  2. Risk per shareBuy £20, stop £18: £2 a share
  3. How many shares£100 ÷ £2 = 50 shares

If the stop is hit, 50 shares × £2 = £100: exactly 1% of the account.

Why the amount you risk matters so much

Every strategy has runs of losing trades. If you risk 1% each time, ten losses in a row cost about 9.6% of your account. If you risk 10% each time, the same ten losses cost about 65%. You would then need to make about 186% just to get back to where you started.

Many traders risk between 0.5% and 2% per trade. The trader and author Alexander Elder suggests never risking more than 2% of your account on one trade2.

What 10 losing trades in a row cost you

  • Risk 1% a trade9.6%
  • Risk 2% a trade18.3%
  • Risk 5% a trade40.1%
  • Risk 10% a trade65.1%

Each loss is taken from what’s left, so the total is a little less than 10 × the risk. After losing 65%, you’d need to make about 186% to get back to where you started.

Measuring results in R

The amount you risk on a trade is called 1R1. If you risk £100, then 1R is £100.

Measuring results in R lets you compare trades of different sizes. A £300 gain on a £100 risk is +3R. A full loss at your stop is −1R.

Results in R when you risk £100 a trade (1R = £100)

What happenedIn poundsIn R
Price hit your stop−£100−1R
Price hit a target three times your risk+£300+3R
You closed early for a small gain+£50+0.5R

Divide the result in pounds by the amount you risked. That makes trades of different sizes easy to compare.

Stop loss first, size second

Put your stop loss where your trade idea is proven wrong, for example just below a recent swing low. Then let the size adjust. A stop further away means you buy less. A closer stop means you buy more.

Never move your stop just to buy a bigger size.

Same £100 risk, different stops (share price £20)

Stop distanceShares you can buyPosition worth
£1 below entry100£2,000
£2 below entry50£1,000
£4 below entry25£500

A stop further away means you buy fewer shares. Each row still loses £100 if the stop is hit.

Things that can make a loss bigger than planned

A stop order becomes a market order when it is triggered, so you can be filled at a worse price than your stop3. If price gaps past your stop, the loss can be well over 1R.

Work out each size from your current balance. Then your trades get smaller after losses and bigger after gains. It also helps to cap the total risk of all your open trades together, for example at 5%.

Worked example: a gap past your stop

You buy 100 shares at £20 with a stop at £19
Plan: lose £100 (1R)
Bad news overnight. The share opens at £17.50
Your stop sells at the open: 100 × (£20 − £17.50)
−£250
Loss in R: £250 ÷ £100
−2.5R

Gaps are rare, but they’re why you keep each risk small.

Position sizing rules

Entry

  • Find your entry price and stop loss from your strategy.
  • Money at risk = account balance × risk %.
  • Size = money at risk ÷ (distance from entry to stop × value of a 1.00 price move). Round down.

Exit

  • This method works with any strategy’s exit rules.
  • If the stop is hit, the loss should be close to your planned 1R.

Risk

  • 0.5–1% per trade is a sensible starting point for beginners.
  • Cap the total risk of all open trades.
  • Check your broker’s margin rules if you use leverage.

Worked example: sizing a UK share trade

  1. Your account is £12,000. You risk 1%: £120.
  2. You plan to buy at £2.50 with a stop loss at £2.38. That is £0.12 of risk per share. (A share website may show these prices in pence, as 250p and 238p.)
  3. Size = £120 ÷ £0.12 = 1,000 shares, worth £2,500 in total.
  4. If the stop is hit, you lose about £120, plus costs and any slippage.

Pros and cons of the 1% rule

Strengths

  • Keeps every loss small and predictable.
  • Adjusts the size to your stop distance automatically.
  • Reduces your risk after losses.

Weaknesses

  • Grows an account more slowly than risking more.
  • Gaps and slippage can still make a loss bigger than planned.
  • On its own, it doesn’t stop you holding several trades that tend to move together.

Key terms

Position size
How many shares, contracts or units you buy or sell.
Risk per trade
The amount you will lose if your stop is hit, as a percentage of your account.
R
One unit of risk: the amount you stand to lose on a trade.
Drawdown
A fall in your account from its highest point.
Total open risk
How much you would lose if every open trade hit its stop at once.
Correlation
How closely two markets tend to move together.

Sources

Numbers in the lesson, like 1, point to these sources.

  1. Tharp, V. K. (2007), Trade Your Way to Financial Freedom, 2nd edition. Book (McGraw-Hill).
  2. Elder, A. (2002), Come Into My Trading Room. Book (Wiley).
  3. Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders. Investor.gov (SEC).

Lesson complete

You have reached the end of the lesson. Now test what you learned with the five-level quiz.

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Quiz zone

Test yourself: Position Sizing and the 1% Rule quiz

Five levels, from the basics to expert judgment. Clear each level to unlock the next.

  1. Level 1: Foundations. Recognise the strategy and its vocabulary.
  2. Level 2: Mechanics. Know how the signals and rules work, and why.
  3. Level 3: Application. Apply the rules to realistic chart situations.
  4. Level 4: Numbers & risk. Size, measure and manage the trade with real calculations.
  5. Level 5: Mastery. Judge edge cases, failure modes and market conditions.

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See all 30 questions in this quiz

The questions only. Answers and explanations appear when you take the quiz above.

Level 1: Know the 1% rule

  1. With the 1% rule (fixed fractional sizing), what stays the same from one trade to the next?

    • The number of shares you buy
    • The amount of money you put into each trade
    • The distance to your stop loss
    • The percentage of your account you risk

  2. How much of their account do many traders risk on each trade?

    • Whatever feels right on the day
    • About 25%
    • Between 0.5% and 2%
    • Between 10% and 20%

  3. True or false: you should decide your stop loss first, then work out how many shares to buy.

    True or false?

  4. What does 1R mean?

    • The price of one share
    • A 1% gain
    • One trade a day
    • The amount you risk on a trade

Level 2: Understand how sizing works

  1. You risk the same 1%, but this trade’s stop is twice as far from your entry as last time. What happens to the number of shares?

    • It doubles
    • It drops to zero
    • It stays the same
    • It halves

  2. True or false: because you size from your stop, a loss can never be bigger than your planned 1%.

    True or false?

  3. Why work out each trade’s size from your current account balance?

    • Trades get smaller after losses and bigger after gains, which protects your account
    • Brokers require it
    • It makes every trade a winner
    • It means you always buy the same number of shares

  4. Why is it a bad idea to move your stop closer just so you can buy more shares?

    • The stop should sit where your idea is proven wrong. A stop placed just for size gets hit by normal price wobbles
    • It isn’t: closer stops are always better
    • It makes the trade cost more commission
    • Brokers don’t allow close stops

  5. You lose ten trades in a row. Roughly how much of your account is gone if you risk 10% a trade?

    • Exactly 10%
    • About 65%
    • About 20%
    • Exactly 100%

Level 3: Use it in real decisions

  1. Two trades both risk 1%. Trade A’s stop is 2% below its entry. Trade B’s stop is 8% below. Which is true?

    • A is a bigger position than B, but both lose the same amount if stopped out
    • B is the bigger position
    • A risks more money than B
    • They are the same size

  2. You have five open trades, each risking 1%. Your rule caps total open risk at 5%. You see a sixth trade. What do you do?

    • Skip it, or wait until your open risk falls
    • Take it at full size
    • Close your best trade to make room
    • Take it and raise your cap to 10%

  3. After a 15% drop, a trader raises their risk from 1% to 3% a trade to win it back faster. What’s the danger?

    • There’s no danger if the strategy is good
    • They will win back the money three times as fast, guaranteed
    • Their broker will close the account
    • If losses continue, they now come three times as fast and the drop gets much deeper

  4. A share gaps down overnight and opens well below your stop. What happens?

    • You lose exactly 1R
    • You lose more than 1R, because the stop fills at the next price available
    • The broker refunds the extra loss
    • The trade stays open until price returns

  5. Where should you put your stop loss?

    • You don’t need a stop with the 1% rule
    • Exactly 1% below your entry, every time
    • Where your trade idea is proven wrong, such as just below a recent swing low
    • Wherever gives you the most shares

  6. Your trade hits its stop and you lose the amount you planned. What is the result in R?

    • −1R
    • 0R
    • +1R
    • −2R

Level 4: Work out position sizes

  1. Your account is £10,000 and you risk 1% a trade. How much money do you risk on each trade, in pounds?

    Type a number (at risk).

  2. You risk £100. You buy at £20 with a stop at £18. How many shares should you buy so that hitting your stop loses only £100?

    Type a number (shares).

  3. Your account is £12,000. You buy at £2.50 with a stop at £2.38. How many shares should you buy so that hitting your stop loses only 1% of your account?

    Type a number (shares).

  4. You risk £100 on a trade and make £300. What is the result in R?

    Type a number (R).

  5. Your account is £5,000 and you risk 2%. You buy at £10 with a stop at £9.50. How many shares should you buy so that hitting your stop loses only 2% of your account?

    Type a number (shares).

  6. You risk £100. You buy at £30 with a stop at £27. How many shares? Round down to a whole share.

    Type a number (shares).

  7. This price is given in pence. Your account is £8,000 and you risk 1%. You buy at 400p with a stop at 380p. How many shares so that hitting your stop loses only 1%?

    Type a number (shares).

Level 5: Think about survival

  1. Two traders use the same strategy. A risks 1% a trade and B risks 5%. Both lose 12 trades in a row. Roughly how much does each lose?

    • A about 11%, B about 46%
    • A 12%, B 60%
    • A about 1%, B about 5%
    • Both about 12%

  2. One futures contract gains or loses $50 for every 1-point move. Your account is $40,000 and you risk 1% ($400). Your stop is 30 points away. How many contracts can you trade?

    • Twenty-six
    • Eight
    • One
    • None: one contract would risk $1,500, far more than your $400

  3. Why might a trader choose 0.5% risk instead of 2%, even with a strategy that has worked well?

    • Brokers charge less for small trades
    • Smaller risk always means bigger profits
    • Smaller losses make bad runs easier to sit through, so they’re more likely to stick with the strategy
    • It isn’t sensible: 2% is always better

  4. You hold three trades in technology shares, each risking 1%. Why might calling this “3% total risk” be misleading?

    • Technology shares never fall
    • It’s really only 1% total
    • The 1% rule doesn’t work for technology shares
    • The shares tend to move together, so they may all hit their stops at once, like one bigger trade

  5. Your account falls by 50%. What gain do you need to get back to where you started?

    • 25%
    • 100%
    • 50%
    • 75%

  6. Alexander Elder suggests a maximum risk on any one trade. What is it?

    • 10% of your account
    • There is no limit
    • 2% of your account
    • 1% of your profits

  7. Your account grows from £10,000 to £12,000. You keep risking 1%. How much do you risk on your next trade?

    • £200
    • £100
    • £1,200
    • £120

  8. You planned to risk £100, but a gap meant you lost £250. What was the result in R?

    • −1R
    • −250R
    • +2.5R
    • −2.5R

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