Position sizing: the 1% rule

Most beginners pick a lot size by feel, or by what the platform defaults to. That single habit ends more accounts than bad analysis does, because it decides what a losing streak costs — and everyone gets a losing streak.

The rule in one line

Decide the money you are willing to lose on a trade before you decide the size, then let the stop distance work out the size for you.

lots = (account balance × risk %) ÷ (stop distance in pips × pip value per lot)

Risk 1% and you can be wrong ten times in a row and still have about 90% of your account. Risk 10% and the same ten losses leave you with a third of it, in a hole that needs a 200% gain to climb out of.

Worked through, twice

A $5,000 account, risking 1%, trading EUR/USD where one pip is worth $10 per standard lot:

Input	Tight stop	Wider stop
Account	$5,000	$5,000
Risk per trade	1% = $50	1% = $50
Stop distance	20 pips	50 pips
Position size	0.25 lots (25,000 units)	0.10 lots (10,000 units)
Value of one pip at that size	$2.50	$1.00

Notice what did not change: the money at risk. That is the entire point. The wider stop does not cost more — it buys a smaller position. Traders who size by lots rather than by risk have it backwards, and end up risking five times more on the trade that happened to need a wider stop.

You can run your own numbers in the position size calculator, which uses exactly this arithmetic.

Why 1%, and when the number should be lower

One percent is not sacred. It is a number small enough that a normal run of losses is an inconvenience rather than an event. Two percent is defensible for an experienced trader with a tested system. Above that, the arithmetic turns on you quickly: at 3% per trade, ten losses cost roughly 30% of the account, and 30% down needs a 42.9% gain just to get back to level — see drawdown math.

Size down, not up, when any of these are true: the pair is unusually volatile that week, you are trading a setup you have not tested, you are trading a funded or evaluation account with a hard daily loss limit, or you have just lost two or three in a row and want it back. That last one is the dangerous one, and it has a name — revenge trading — because it is common enough to need one.

Where margin fits, and why it is not your risk

Margin and risk get confused constantly. They are different things.

Margin is what your broker requires you to post to open the position. Under FCA rules a retail client trading a major currency pair must put up at least 3.33% of the position's value — 30:1 leverage. That is a constraint on the size you can open.

Risk is what you actually lose if the stop is hit. That is the number above, and it is the one that matters.

The 0.25-lot position in the example needs roughly $833 of margin on a $5,000 account, and risks $50. Confusing the two is how people conclude they can afford a much larger position than they can survive.

There is a related protection worth knowing: your broker must close positions when your account funds fall to 50% of the margin required to keep them open. That rule decides when a loss stops. It is not a plan, and it does nothing for you if your sizing is wrong — by the time it fires, the damage is done.

The habit to build

Before every trade, in this order: where does this idea become wrong (that is your stop), how far is that in pips, what is 1% of the account today, and what size does that make. Four questions, thirty seconds. Traders who do them in that order rarely blow up. Traders who choose size first and place the stop where the loss feels bearable eventually do.