The 1% Risk Rule – Risk Management Strategy for Trading

The 1% risk rule is mainly is for day traders and swing traders. You should only ever risk 1% of your total trading account on any given trade, otherwise you may risk losing most of your trading capital.

Example

If you lose 50% of your total trading account on any single trade then you would need 100% gain to recover the lose.

If you lose 20% of your total trading account on any single trade then you would need 25% gain to recover the lose.

If you lose 1% of your total trading account on any single trade then you would need 1.1% gain to recover the lose.

here is a table with % lose and % need to recover the loss, after clicking the link scroll all the way down to see the table

Now here is why is better to only risk 1% of your total trading capital in any single trade.

If you were to lose 10 trades whether in row or not, Risking only 1% of your total capital per trade then you would need 11.1% to recover the loses.

Risk And Reward Ratio

The risk and reward simply measures the percentage you risking with the percentage you gaining.

Example

1:5 you risk one dollar to gain five dollars.

1:4 you risk one dollar to gain four dollars.

1:1 you risk one dollar to gain one dollar.

Now Image if you decide to trade with the luck of quarter. Since it’s a quarter then you either going to have head or tail. Meaning you have 50% change to win and 50% change to lose.

Using the 1% risk rule for risk management to protect your trading capital. Also use the risk and reward ration of 1:1.5. Meaning you risk 1% of your total trading capital if lose. But Win 1.5 % of your total trading capital if you win.

You don’t need to be a mathematician to know that in the long run you will be wining as long as you follow the formula. This is a over simplify explanation but is so you can get a idea.

This is my option, if you are still green meaning you are a beginner. You should only be using the 1% risk rule, with 1:1.5 risk and reward ration.

Bonus:

You may want to forget all the indicators if you are a beginner. What you need is to simplify things. Just focus on price action. The 1% rule, and risk and reward of 1 to 1.5.