The one-percent rule
A common ceiling is one percent of the account per individual position. That way you can survive even a long losing streak without being knocked out of action.
With a €5,000 account, one percent means a single failed trade can cost at most €50. It's not the position that's capped at €50, it's the loss.
That sounds small, and that's exactly the point. Ten failures in a row cost you around ten percent. You're bruised, but still able to act. At ten percent risk per trade, the same ten failures would be the end.
Losing streaks are normal, not exceptional. Someone who's right six times out of ten will still regularly go through five or six losses in a row. That's not bad luck, that's statistics.
The rule applies to active trading with individual positions. For a broadly diversified savings plan you don't need it, since no single holding there can take you down.
The probability of a losing streak is higher than intuition suggests. At a 55 percent win rate, the probability of six consecutive losses in a single sequence is 0.45^6 ≈ 0.83 percent. Across a hundred trades, though, at least one such streak occurring is likely, since there are correspondingly many possible starting points.
The one-percent ceiling can be read as a simplified form of growth optimization. The Kelly criterion determines the growth-optimal stake as a fraction, f = (p·b − q) / b, with p the win probability, q the loss probability, and b the win-loss ratio. Since p and b are estimated in practice and usually overestimated, only a fraction of the Kelly value is typically used, which lands in the range of the one-percent rule.
Handling correlation matters a great deal. Five open positions at one percent risk each mean five percent total risk only if they're independent. With aligned positions in the same sector or asset class, the actual risk of a joint move can sit close to the sum. The rule therefore needs to be applied at the portfolio level, not just per position.
Summary
- One percent caps the loss, not the position size.
- Streaks of six losses are normal, not exceptional.
- Aligned positions add up their risk almost fully.
Did you get it?
What exactly does the one-percent rule limit?
The maximum loss of a position, not the capital deployed.
Why is only a fraction of the Kelly stake used?
Because win rate and win-loss ratio are estimated and usually overestimated.
Why isn't the rule enough applied per position alone?
Because correlated positions move together and their risk nearly adds up.
Related
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- DrawdownStage 2
- Risk and return are linkedStage 0