The 1% Risk Rule is a fundamental pillar of professional capital preservation. It dictates that a trader should never risk more than 1% of their total account equity on a single trade setup.
Many beginner traders confuse Position Size with Capital at Risk, leading to improper trade allocation.
The 1% Rule in Practice
| Amount | |
|---|---|
| Total Account Capital | ₹5,00,000 |
| Maximum Allowed Risk (1%) | ₹5,000 |
- ❌ Incorrect: Buy ₹5,000 worth of stock total
- ✅ Correct: Calculate share quantity so that (Entry − SL) × Qty + execution fees = ₹5,000
The Position Sizing Formula
To apply the 1% rule, derive share quantity based on stop-loss distance rather than fixed cash allocation:
Account Risk (₹) = Total Capital × 0.01
Risk Per Share (₹) = Entry Price − Stop Loss Price
Max Position Size (Shares) = Account Risk (₹) / (Risk Per Share (₹) + Per-Share Charges)
Mathematical Worked Example
- Account Capital: ₹2,00,000
- Maximum Risk (1%): ₹2,000
- Stock Entry Price: ₹250
- Stop Loss Price: ₹240
- Risk Per Share: ₹10
- Raw Quantity = ₹2,000 / ₹10 = 200 Shares
- Total Position Value: 200 × ₹250 = ₹50,000 (25% of capital)
- Maximum Monetary Risk: 200 × ₹10 = ₹2,000 (exactly 1%)
Mathematical Survival Proof: 1% vs. 5% Risk (10 Losing Trades from ₹1,00,000)
| Risk Rule | Starting Capital | After 10 Losses | Drawdown |
|---|---|---|---|
| 1% Fixed Risk | ₹1,00,000 | ₹90,438 | −9.56% |
| 5% Fixed Risk | ₹1,00,000 | ₹59,873 | −40.13% |
| 10% Unmanaged | ₹1,00,000 | ₹34,868 | −65.13% |