What is the 1% Rule in Forex Trading?
Quick Answer: The 1% rule states you should never risk more than 1% of your account on a single trade. This risk management principle protects you from catastrophic losses - even 20 consecutive losses only cost 18% of your account at 1% risk vs 88% at 10% risk per trade.
The 1% Rule in Forex Trading
The 1% rule is a risk management guideline stating you should never risk more than 1% of your total account equity on any single trade. It's the single most important rule for survival in trading, protecting you from catastrophic losses.
Why 1% Matters
Consider the math of consecutive losses:
| Consecutive Losses | Risking 1% | Risking 5% | Risking 10% |
|---|---|---|---|
| 5 losses | -4.9% | -22.6% | -41.0% |
| 10 losses | -9.6% | -40.1% | -65.1% |
| 20 losses | -18.2% | -64.2% | -87.8% |
How to Apply the 1% Rule
Step-by-step position sizing calculation:
- Determine account size: $10,000 account
- Calculate 1% risk: $10,000 × 0.01 = $100 maximum risk
- Identify stop loss distance: 50 pips away from entry
- Calculate position size: $100 ÷ 50 pips = $2 per pip
- Convert to lot size: $2/pip = 0.2 standard lots (20,000 units)
The Survivability Advantage
Even with a 40% win rate (losing 6 out of 10 trades), the 1% rule keeps you alive. With proper risk/reward ratios (1:2 or better), you're profitable while surviving inevitable losing streaks. Contrast this with risking 10% per trade - just 10 consecutive losses wipes out 65% of your account. The 1% rule isn't about being conservative - it's about being around long enough to capitalize on your edge.
Related Terms
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