How Much Should You Risk Per Trade? The Math Behind the 1% Rule

The question the 1% rule actually answers

'Risk 1% per trade' is not a claim that 1% is optimal. It is an answer to a survival question: how large can each loss be so that a realistic losing streak leaves the account — and the trader — able to continue. The right number differs by strategy and temperament, but the way to choose it is the same: run the streak arithmetic and look at the result honestly.

What a losing streak does at each level

Fixed-fractional risk compounds down gently. Ten consecutive losses at 1% leave (0.99)¹⁰ = 90.4% of the account — a 9.6% drawdown. The same streak at 3% leaves 73.7%; at 5% it leaves 59.9%, a 40% drawdown. Streaks of ten are not exotic: a strategy that wins 50% of the time will see one about once in a thousand trades, and shorter streaks constantly.

The recovery asymmetry is the sting. A 10% drawdown needs +11% to recover. A 40% drawdown needs +67%. A 60% drawdown needs +150%. Risk per trade is the lever that decides which of those equations you will one day be solving.

Percent of what, exactly

A risk percentage only means something once three definitions are pinned down.

• Of equity, not balance — open risk is already spent budget.
• All-in, not stop-distance-only — fees, spread and expected slippage belong inside the 1%, not on top of it.
• Per position, with a separate cap for total open risk — five trades at 1% each is a 5% portfolio bet if they correlate, which crypto pairs usually do.

From a number to a rule

A percentage in your head is a preference; written into a rule that every trade is checked against, it becomes a constraint. The difference shows up on the worst day, which is the only day the rule was ever for. A review that knows your cap can tell you before entry whether the trade fits it — and when it does not, the size that would.

Common questions