Money management: the 1% rule and how to apply it

Money management decides whether you are still in the market a year from now. It is less interesting than
finding entries, but it is the reason two people running the same strategy get opposite results.

1. The 1% rule

Never risk more than 1% of account capital on one trade. On a $5,000 account, the maximum
loss per trade is $50 — however confident you are.

There is nothing sacred about 1%, but it sits in the sensible range: small enough that a losing run does not
kill the account, large enough that a winning run means something.

2. Why 1% and not 5%

The crux is the arithmetic of recovery. How much you need to gain to get back to where you were:

• Down 10% → need 11%
• Down 25% → need 33%
• Down 50% → need 100%
• Down 75% → need 300%

The relationship is not linear. Past a certain point recovery becomes close to impossible — and that is when
people start increasing size to recover faster, which makes everything worse.

At 1% per trade, ten consecutive losses cost about 10%. At 5%, the same run costs 40%.

3. Three limits to set at once

• Per trade: 1% maximum.
• Total risk open: 3–5% maximum, counting
  correlated positions together. Three short-dollar trades across
  three pairs is one risk, not three.
• Per month: a stop level, say 8%. Reach it and stop until next month. That limit protects you
  from yourself during a bad spell.

4. Applying it: sizing from risk

Lots = Amount risked ÷ (Stop distance in pips ×
pip value)

The order matters: place the stop by price structure first,
then size to fit the risk. Never the other way round.

5. The most common mistake

Increasing size after a losing run. The urge to win it back is instinctive, and it is the
fastest way to lose an account. If any adjustment is warranted after a losing run, it is to reduce size
to 0.5% until results stabilise.

6. Why cost belongs in the money-management chapter

Trading cost is a certain loss, incurred on every trade, regardless of the outcome. An account paying $12 a lot
and one paying $4 net after a rebate have completely different equity
curves after a year, trading identically.

Reducing cost is the only way to improve results without
increasing risk.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.