The 1% rule
Lesson 11 of 16 in the course “Futures from Zero”. Free, with animations and a quiz.
How much you can lose at once
The main survival rule on futures: risk no more than 1% of the account per trade. Risk is how much you lose if the stop hits. Nika has $500, so her risk per trade is $5. Sounds boring, but that’s the point: the account has to survive a long losing streak, because everyone has them, even pros.
Size a position in 30 seconds
One formula: position = risk ÷ distance to the stop. Nika found a spot for the stop 2% from the entry. Risk $5 ÷ 2% = a $250 position. Leverage comes last: at ×5 the margin is $50, and liquidation sits about 20% from the entry, far beyond the stop. That’s exactly how you’ll open your first trade in the practice terminal.
Why not 10%
Even a good strategy sometimes gives 10 losses in a row. At 1% risk that’s −9.6% of the account: unpleasant, but you can keep going. At 10% risk it’s −65%. And to get from −65% back to zero you need +186%. Big bets don’t speed you up, they nearly guarantee you never get there.
How pros do it
We didn’t make this up. Alexander Elder in “Trading for a Living” advises risking no more than 2% per trade and stopping until the end of the month if the account is down 6%. Van Tharp suggests counting trades in R, where 1R is your risk: “+3R” instantly tells you profit was three times the risk. And Mark Douglas in “Trading in the Zone” explains that one trade is almost random, and an edge only shows over a long series.
Check yourself
- A $2,000 account, the 1% rule. How much can you lose if the stop hits?
Correct answer: $20. 1% of $2,000 is $20. That’s the risk, not the position size: the position is bigger and depends on the stop. - Risk $10, stop 4% from the entry. What position size?
Correct answer: $250. Position = risk ÷ stop = $10 ÷ 0.04 = $250. If the stop hits, 4% of $250 is exactly that $10. - Why is 10% risk per trade a bad idea even with a good strategy?
Correct answer: A normal losing streak wipes out most of the account. 10 losses in a row at 10% risk is −65%, and you need +186% to recover. Everyone has losing streaks.