Many professional traders adhere to the one percent risk rule, which states that no more than one percent of a trading account may be risked on any single trade. In other words, if a trader has a €100,000 account, the maximum amount that they can risk is €1,000 per trade.
The reason for the one percent risk rule is to keep the maximum possible loss for each trade at an acceptable amount, and to make sure that no single trade has the ability to blow up a trading account (i.e. lose so much money that the account cannot be traded). Traders that abide by the one percent risk rule, are much more likely to survive an unexpected losing streak, than a trader that risks half of their account on each trade.
Calculating One Percent Risk
One percent risk is calculated in two steps. The first step determines the maximum amount of capital that can be risked, and the second step determines the resulting trade size (i.e. number of shares, or contracts, or forex lots, etc.).
The one percent risk rule is calculated as follows:
- Maximum Capital = Account Size / 100
- Trade Size = Maximum Capital / ((Entry - Stop Loss) x Point Value)
For example, the one percent risk rule for a €100,000 trading account, making a long stock trade with an entry price of €75, and a stop loss price of €70, would be calculated as follows:
- Maximum Capital = €100,000 / 100 = €1,000
- Trade Size = €1,000 / ((€75 - €70) x 1) = 200 shares
The maximum size of the example stock trade is two hundred shares, because if the trade makes a loss (by trading at its stop loss price), the two hundred shares will lose €5 each, for a total loss of €1,000 (which is 1% of the trading account).
As another example, the one percent risk rule for a €30,000 trading account, making a short futures trade on a market with a €10 point value, with an entry price of €4,125, and a stop loss price of €4,150, would be calculated as follows:
- Maximum Capital = €30,000 / 100 = €300
- Trade Size = €300 / ((€4,125 - €4,150) x 10) = 1 contract (actually 1.2 contracts, but this is not possible)
The maximum size of the example futures trade is one contract, because if the trade makes a loss (by trading at its stop loss price), the one contract will lose €250 (which is less than 1% of the trading account).
Using the One Percent Risk Rule
The one percent risk rule, and its calculation, applies to all types of markets (i.e. stocks, futures, options, forex, etc.). The only catch is that you must use the correct point value (the cash value per point of price change), otherwise, you could be risking a lot more than one percent.
