Free Trading School · Level 5: Placing Smart Trades
Position sizing: the 1% rule
Position sizing answers one question: how many shares, units or lots should I buy? Most professionals risk a small fixed percentage of their account on each trade, typically 0.5% to 2%. Beginners should use 1% or less.
- Decide the risk in money: account × risk %. With $10,000 and 1%, that is $100.
- Find the stop distance from the chart: entry $50.00, stop $48.00, so $2.00 per share.
- Divide: $100 ÷ $2.00 = 50 shares. That is your position size.
- Check that the target gives at least 2R: a target at $54.00 makes $4.00 per share, or $200 total.
Why so small? Because losing streaks are normal. Risking 1% per trade, ten losses in a row cost you about 10%. Risking 10% per trade, the same streak costs about 65%, and you would need to almost triple the rest just to get back to where you started.
| Losses in a row | Account left at 1% risk | Account left at 10% risk |
|---|---|---|
| 5 | 95% | 59% |
| 10 | 90% | 35% |
| 20 | 82% | 12% |
Position size = money at risk ÷ stop distance. This one formula protects you more than any indicator.
Quick answers
Position sizing answers one question: how many shares, units or lots should I buy? Most professionals risk a small fixed percentage of their account on each trade, typically 0.5% to 2%. Beginners should use 1% or less.
Position size = money at risk ÷ stop distance. This one formula protects you more than any indicator.
100. 1% of $20,000 is $200. $200 ÷ $2 per share = 100 shares.
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