The rule
Before every trade, you know two numbers: where you're getting in, and where you're getting out if you're wrong (your stop). The 1% rule says the distance between them may cost you at most one percent of your account:
Worked example: a $10,000 account risks $100 per trade. You want to buy a stock at $50 with a stop at $48; that's $2 of risk per share. $100 ÷ $2 = 50 shares. Not 50 because you're confident, not 200 because you're sure: 50 because the formula says 50. Notice what happened: the stop distance chose your size. Wide stop, small position; tight stop, larger position. Every trade carries the same weight of risk.
The survival math
Why one percent? Because losing streaks are not a possibility; they're a scheduled event. A system that wins half its trades will produce a streak of ten straight losses surprisingly often over a few hundred trades. Here's what that streak does at different risk levels, and what it takes to climb back:
| Risk per trade | After 10 straight losses | Gain needed to recover |
|---|---|---|
| 1% | −9.6% | +10.6% |
| 2% | −18.3% | +22.4% |
| 5% | −40.1% | +66.9% |
| 10% | −65.1% | +186.9% |
Compounding works against you on the way down: lose 50% and you need +100% just to break even.
At 1%, the inevitable bad streak is an annoyance. At 5%, it's a crisis that will push you into revenge trades. At 10%, it's the end of the account. The rule isn't about being timid; it's about guaranteeing you're still present when your edge finally pays.
Sizing is the edge nobody wants
Van Tharp spent a career arguing that traders obsess over entries when expectancy and position sizing dominate long-run results; his Trade Your Way to Financial Freedom is the standard text. The Turtles built their whole system on the same insight, sizing every position by volatility so each trade carried equal risk. The entry was almost the least important part.
How people defeat the rule
- Setting the stop after the size. Decide the exit first; the size falls out of it. Doing it backwards is just choosing a position and decorating it with a stop.
- Confusing position size with risk. "I only put 10% of my account in" means nothing without a stop. 10% of your account with no exit is unlimited risk.
- Moving the stop. A stop you widen under pressure was never a stop; it was a decoration. The 1% was spent the moment you entered.
- Risking 1% on ten correlated trades. Ten tech stocks with 1% each is one 10% bet on tech wearing a disguise. Count correlated positions as one.
Know your numbers
A rule this simple only works if you actually track what you're doing. That's the journal's job.