The 1% Risk Rule for Day Trading and Swing Trading - Trade That Swing (2024)

The 1% risk rule means not risking more than 1% of account capital on a single trade. It doesn’t mean only putting 1% of your capital into a trade. Put as much capital as you wish, but if the trade is losing more than 1% of your total capital, close the position. Risking 1% or less per trade is the standard for most professional traders.

For day traders and swing traders, the 1% risk rule means you use as much capital as required to initiate a trade, but your stop loss placement protects you from losing more than 1% of your account if the trade goes against you. Whether you use a stop loss or not is up to you, but the 1% risk rule means you don’t lose more than 1% of your capital on a single trade.

If you allow yourself to risk 2% then, it would be the 2% rule. If you only risk 0.5%, then it is the 0.5% rule. The concept is the same regardless of the exact percentage chosen: control your risk and keep losses on any single trade to a small percentage of the account.

Here is a video discussing some of the concepts in the article.

Why Use the 1% Risk Rule?

Losing trades will happen, and if they aren’t controlled, even one losing trade that’s allowed to run can decimate an account. The 1% risk rule prevents a loss from getting out of hand. By following the rule, it takes many losing trades in a row to hurt the account.

Even while controlling risk and keeping it to 1% per trade, high returns are still possible. So you aren’t losing out by following this rule. In fact, following a rule like this is necessary if you want to achieve good returns, consistently, because controlling losses and keeping them small is a key component of successful trading. The other element is creating a strategy that has a favorable reward:risk so your winning trades are bigger than your losses. You’re risking 1% of your account per trade, but your winning trades are adding 3%, 5%, or 10% to your account, for example.

MyEURUSD Day Trading Courseteaches you how to day trade the EURUSD in 2 hours or less a day, with the potential to make double-digit percentage returns each month (with practice) with patterns that tend to occur almost every day.

Example of the 1% Risk Rule in Action

Take 1% of whatever your account equity is. This is how much you can lose on a single trade.

As your account equity changes, so will the amount you can risk.

For day trading, I use 1% of my daily starting equity and that’s how much I risk per trade all day. This way I don’t have to recalculate each time I make a day trade. The next day, my risk per trade may be slightly different.

For swing trading, use 1% of your current equity.

Assume your account equity is $10,560. It doesn’t matter if you are trading stocks, forex, or futures, the process is the same.

1. 1% of the account is $105.60 (0.01 x 10,560). Round that off if you like to $105 or $106. That is how much you can lose per trade. We will call this dollar amount the Account Risk.

2. Next, you need to determine how much capital you are going to put into the trade based on the Account Risk and our Stop Loss size. The size of the Stop Loss is the difference between the entry price and stop loss price.

Assume you enter a stock at $125.35, and place a stop loss at $119.90. The stop loss size is $5.45. This means if your stop loss is hit you lose $5.45 for every share you own.

3. You are allowed to lose $105.60, so divide that by $5.45.
Account Risk ($) / Stop Loss Size = 105.60 / 5.45 = 19.37 shares, or 19 shares.

19 shares will cost: 19 x $125.35 = $2,381.65…that is much more than 1% of the 10K account (it’s about 1/4 of the account in this case), but the trade is only risking 1% of the account equity.

Do the math backwards to make sure you have the correct position size and your risk is only 1%.

If you buy 19 shares and lose $5.45 on each share, you will lose $103.55.
Your account equity is $10,560 and you are allowed to lose 1% of that, which is $105.60. Therefore, your potential loss on the trade is within your 1% risk rule. Read more stock position sizing in How Much Stock to Buy.

Forex and futures work the same way, except you must also know the pip value for forex or the tick/point value for futures. Read all about forex position sizing in Forex Position Sizing Methods.

As a side note, no matter what size my stop loss is, I ONLY take a trade if expect that I can profit at least 2.5x as much as I’m risking. For example, if my stop loss size is $1, then I will only take the trade if I reasonably expect that the price will hit a target that is $2.50 or more above my entry.

For day trading I use 2 to 2.5x, for swing trading I typically am looking for more than 3x. To learn more about setting profit targets, and collecting bigger profits relative to losses, see How to Set Profit Targets When Swing Trading Stocks.

MyComplete Stock Swing Trading Coursefocuses on 4 patterns that tend to occur in strong stocks right before an explosive move.
Learn how to read market conditions, how to find potentially explosive trades, where to get in and get out, how to fine-tune trade selection, and how to manage risk.

Understand the 1% Risk Rule to Apply It to Your Trading

The 1% risk rule is all about controlling the size of losses and keeping them to a fraction of the account.

But doing this requires determining an exit point (the stop loss location), before the trade, and also establishing the proper position size so that if the stop loss is hit only 1% of the account is lost.

This may seem like a lot of work, but there are big rewards:

  • Big losses will be extremely rare. The price can still gap through a stop loss, resulting in a larger loss than expected. But you would still be facing the loss even without the stop loss. The occasional trade that gets stopped out and then runs in your expected direction is a small price to pay for controlling risk on ALL trades; you can always re-enter if needed.
  • Risking 1% per trade can actually be highly profitable with a favorable reward:risk. One losing trade costs 1%, but winning trades are adding 2.5%, 4%, or even 10% or more to your account balance. This has nothing to do with how far the asset moves in percentage terms, and everything to do with the position size and your reward to risk.
  • The formula may tell us to put all our capital, or more (requiring leverage), into a trade. This may be ok if you can likely get out at your stop loss price. Spread out capital if the price could gap through your stop loss, or exit trades before gap events (major news events, earnings, or even the stock market closing for the weekend, or the forex market closing for the weekend). Any event where price can potentially gap means you could theoretically be risking much more than you think. Plan accordingly; please read the position sizing articles linked above for more information.

Does the 1% Risk Rule Apply to Investors?

I hold long-term investments which are buy-and-hold. I do not use the 1% risk for these, because I’m not using a stop loss.

Instead, with investments, I only put a certain percentage of my account into each asset, typically about 2% to 5% for individual investment stocks, and 10% to 20% for index ETFs. I pick a handful of index funds and determine what percentage of my account I will allocate to each fund.

The more niche the index ETF, the less capital I give it. The more diversified the fund, the more capital I give it. For example, to a technology fund I may allocate 10-15% of my account, while an S&P 500 ETF may get 30%. An individual stock may only get 2% to 5% of the capital, for example.

If I’m buying index funds there’s very little risk of of any these investments going to zero. But at the same time, I want to spread out my capital in case anything were to happen, especially with individual stocks.

Even if a stock plummets all the way to zero, I still only lose a small percentage of my account. But I don’t use stop losses to control risk any further because these are long-term holds and I don’t want to waste time or fees jumping in and out of positions. That said, with individual stocks, I may get out of a position if the reason I bought the company is gone (they are no longer growing, for example).

I also like this approach because it diversifies my strategies. When I day trade and swing trade I am capturing short-term price moves and moving in and out of the market. With this investment account, I am staying invested, capitalizing on longer-term trends, which make money with barely any effort.

FAQs

What is the formula for the 1% Risk Rule?

  1. Calculate Account Risk in dollars, which is 1% of the account equity.
  2. Calculate the Stop Loss Size for a given trade, which is the difference between the entry price and stop loss order price.
  3. Calculate position size: Acount Risk ($) / Stop Loss Size = Position size in shares/lots
  4. To check your math, multiply your position size by the stop loss size. This should be equal to or less than 1% of your account equity.

What is the most I should risk per trade?

When day trading or swing trading, risk no more than 1% of account capital. Risk 2% at most. Most professionals risk 1% or less.

What is the 2% Risk Rule?

Under this rule, the trader doesn’t lose more than 2% of their account equity on a single trade. For example, on a $10,000 account, exit a trade at a $200 loss, or before (0.02 x $10,000).

Can I risk 5% per trade?

It is typically only traders with small accounts or lack of experience that want to risk 5% per trade. The lack of experience or capital could be costly, since losing even several trades in a row could rapidly deplete the account. When starting out, it is better to risk 0.5% or even 0.25% per trade. Once you see consistent profits over several months, then move up to 1% per trade. There is lots of profit potential with risking 1%. There is little reason to risk 5% per trade.

BY Cory Mitchell, CMT

Want some guidance with your trading? Check out my trading courses.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

Related

The 1% Risk Rule for Day Trading and Swing Trading - Trade That Swing (2024)

References

Top Articles
Latest Posts
Article information

Author: Lilliana Bartoletti

Last Updated:

Views: 5851

Rating: 4.2 / 5 (73 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Lilliana Bartoletti

Birthday: 1999-11-18

Address: 58866 Tricia Spurs, North Melvinberg, HI 91346-3774

Phone: +50616620367928

Job: Real-Estate Liaison

Hobby: Graffiti, Astronomy, Handball, Magic, Origami, Fashion, Foreign language learning

Introduction: My name is Lilliana Bartoletti, I am a adventurous, pleasant, shiny, beautiful, handsome, zealous, tasty person who loves writing and wants to share my knowledge and understanding with you.