Risk Per Trade — the 1% Rule

The definition

Risk per trade = the money you lose if your stop is hit — NOT the money you invest. The 1% rule: never risk more than 1% of your account on a single idea. A $50,000 account risks $500 per trade. Note the inversion beginners miss: you might INVEST $20,000 while risking only $500, if the stop is tight. Position size is derived from risk, never the reverse.

Why 1%

Survivorship math: at 1% risk, 10 straight losses = −9.6% (survivable); at 10% risk, the same streak = −65% (career-ending). Losing streaks of 8–10 are NORMAL for any strategy with a 50% win rate — the rule exists so a normal streak cannot remove you from the game. The trader who cannot survive variance cannot collect the edge.

The sizing formula

Shares = (Account × Risk%) ÷ (Entry − Stop). $50,000 account, 1% risk ($500), entry $100, stop $95 → $500 ÷ $5 = 100 shares ($10,000 invested, $500 at risk). The stop distance controls size: tight stop → big position; wide stop → small position. This is how professionals take large positions without large risk.

Sources

• Trade Your Way to Financial FreedomVan K. Tharp
• Position SizingInvestopedia