The goal of every trader is to become consistently profitable. There is no question about this !
However all good traders know that you don’t win every trade.
So the question becomes? How do you protect your capital during the drawdowns (Losing streaks) in order to make money when your strategy is working for you. This is where the 1% rule becomes very useful. The one percent rule ensures that your losses are capped but still allowing unlimited potential to the upside.
Forex trading is a game of probability, you lose some and you win some. But over the long run you will end up profitable. Given that you have a well tested strategy and you follow the rules.
The 1% rule was invented in order to help trades protect their capital during those down days.
What is the 1% rule?
One percent rule is where you only risk 1% of your capital. If you have a trading account $10,000, 1% rules state that you can only risk $100 per trade. Don’t get this mixed up, your total dollar value of your position can be any amount and frequently more than $10,000 in Forex.
There are two ways to calculate your position size to match 1% risk of Capital:
Method 01 – Manual calculation
Let’s say you’re looking at a long position on EURUSD above $1.6700. You look at the price action and decide that the recent swing low was 30 pip below. Take the same example of an account size of $10,000, and 1% riks of $100 per trade. In order to calculate the position size that you need to adhere to the one percent rule you simple divided $100 ( Your per trade risk amount at 1%) by the number of pips you would risk. In this case its 30 pips.
$100 ( 1% of your total capital)/Number of PIP from the entry point to the stop-loss
100/30 = $3.33 per PiP
This provides the cost per pip. You can now match this cost per pip value on your broker platform
Method 02 : Online calculator
In order to become profitable in the long term always enter trades that provide 2:1 risk to reward. If you are risking 20 pip at least ensure that the trade has the potential move 40 pips in your favour.
All professional traders apply the one percent rule or a variation of this. Some professionals have different percentage ratios depending on the strategy they are tradining. Some apply different percentage risk ratios depending how successful they are for the month. For an example I know of a professional trade who reduces the 1% risk down to 0.5% risk if he has more than a 5 trade losing streak until he wins 3 trades in a row. Most professionals reduce their risk % as their account size becomes larger. This usually happens when your account balance exceeds $100,000 USD. Remember managing your greed is a key reason for success. More money doesn’t always mean more happiness.