Risk & Money Management · Beginner · 5 min
The percent-risk rule
You can apply the percent-risk rule, calculate what a losing streak costs at different risk levels and explain why the percentage is a choice.
One rule, one sentence
How much should a single trade be allowed to cost? Without an answer, every trade gets a different size, chosen by mood: bigger after wins, bigger still after losses.
Many traders answer the question with one simple rule that fits in a single sentence. It does not tell you what to trade or when. It only makes sure that no single trade, and no normal losing streak, can do serious damage.
A small, fixed share
The percent-risk rule says: never lose more than a fixed percentage of your current account on one trade. If the trade reaches your stop, that is the loss.
Common choices are 1% or 2%. CME Group's trader education describes the 2% rule as a popular method and notes that the 2% threshold is completely arbitrary. You can choose a tighter or looser level, as long as you choose one and stick to it. Many traders who are starting out choose 1% or less.
The chart shows why a small percentage matters. Each line takes the same 16 fictional trades, starting with ten losses in a row:
- At 1% risk, the ten losses cost about 9.6%.
- At 2% risk, about 18.3%.
- At 10% risk, about 65.1%.
Because each loss is a percentage of the current, shrinking balance, the losses get slightly smaller in money as the account falls. That is a built-in brake. With a small percentage, even a long losing streak leaves most of the account intact, and the trader can keep following the plan.
The rule limits the loss, not the position. How many shares or contracts you buy depends on how far away your stop is, which is the topic of the lesson on position sizing.
1% of what you have now
A fictional account holds 15,000. The trader uses a 1% rule.
- The first trade may lose at most 150. It hits the stop, and the account falls to 14,850.
- The next trade may lose at most 1% of 14,850, which is 148.50.
- After a winning trade lifts the account to 15,300, the limit rises to 153.
The limit always follows the account. Some traders recalculate it once a week or once a month instead of after every trade, which is simpler and works similarly. What matters is that the limit is decided before the trade, written down, and never raised because a setup feels especially good.
Common mistakes
- Confusing risk with position size. 1% risk does not mean a position worth 1% of the account.
- Ignoring costs and slippage. In fast markets, a stop can fill worse than planned. Leave room for that.
- Raising the percentage after a streak. That is the moment the rule matters most.
- Several trades at once. Five open trades at 2% each can mean 10% at risk if they move together.
- Using last year's account size. The limit should follow the account as it is now.
The takeaway
The percent-risk rule caps each loss at a small share of the account. A losing streak then hurts, but it doesn't end your trading.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the line that would be hardest to recover from.
Tap the chart.
Risking 10% per trade, ten losses in a row cost about 65% of the account. Getting back would need a gain of almost 190%.
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2An account holds 20,000. Using a 1% rule, what is the most one trade may lose?
1% of 20,000 is 200. The rule sets the maximum loss, not the size of the position.
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3Ten losses in a row at 2% risk per trade. Roughly what does that cost?
Each loss is 2% of the current, shrinking balance: 0.98 to the power of 10 is about 0.817, a loss of about 18.3%.
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4What does CME Group's education say about the 2% threshold?
The percentage is a personal choice. What matters is that it is small and that you apply it every time.
of 4 correct.