The 1% rule and position size

Lesson five: the one percent rule and position size. Most beginners pick a size by feel, then find out what they could lose. You'll do it the other way round: first decide what you're willing to lose, then let simple math set the size.

Losing streaks happen, even with a good plan. Picture two paper accounts, each with $10,000. The first risks $1,000 on every trade. The second risks $100. Give them the same bad run: ten losses in a row. The first account is empty. The second still has $9,000, and it's still in the game. Deep holes are also hard to climb out of. Lose half, and $10,000 becomes $5,000. To get back, you'd need to double it.

That's the idea behind the one percent rule. On any single trade, if your stop is hit, you plan to lose at most one percent of your account. With $10,000, that's $100. This is your risk amount. It isn't the size of the trade. It's what you lose if you're wrong. And it moves with the account. At $12,000, one percent is $120. At $8,000, it's $80, so a losing run shrinks your trades on its own.

To turn that $100 into a trade size, you need one more thing: your stop. A stop is the price where your idea is proven wrong, and you get out. Lesson six covers where to put it. Here, only the distance matters. Say you buy Bitcoin at $60,000, with a stop at $58,800. The gap is $1,200. Divide that by the entry price, and you get two percent.

Now the formula. Position size equals your risk amount, divided by your stop distance. That's $100 divided by two percent: a $5,000 position. Let's check it. If the price falls to your stop, you lose two percent of $5,000. That's exactly $100. In coins, it's $100 divided by the $1,200 gap: a twelfth of a Bitcoin. A $5,000 position might sound big for a $10,000 account. But size isn't risk. The stop limits the loss. Fees, and a worse price in a fast market, can still push it past $100.

Keep the same $100 of risk, and move the stop. With a stop one percent away, the position is $10,000. At two percent, it's $5,000. At four percent, $2,500. A wider stop means a smaller position. And every time, the loss if you're wrong is the same $100. The stop decides the size, never the other way round. Say you pick a size you like, then squeeze the stop to fit. Now it no longer marks where you're wrong. That's how a plan turns into a gamble.

Where does leverage fit in? It sets how much of your money the exchange holds as margin. That $5,000 position at five times leverage needs $1,000 of margin. At ten times, $500. Either way, if the stop is hit, you lose $100. The margin changed. The risk didn't. But leverage pulls your liquidation price closer, as you saw in lesson three. With ten times leverage, liquidation sits roughly ten percent away, well past your stop. At fifty times, it's roughly two percent, or a little less. You'd be liquidated before your stop is reached. Your stop has to come first.

Try it yourself. Open the position-size calculator on this page. Enter a $10,000 paper account, one percent risk, and a stop two percent away. You should get $5,000. Then open Bentley's public market report. Each setup shows an entry zone and a stop. Take the middle of the entry zone, measure the gap to the stop, and size it the same way. A close stop can give a position bigger than your account. Your risk is still $100. Shorts work the same way, with the stop above the entry. Each setup is an idea to test on paper, not an instruction.

Let's recap. Losing streaks happen, so risk a small, fixed slice of your account on every trade. One percent of $10,000 is $100. The stop distance sets the size: $100 divided by two percent is a $5,000 position. A wider stop means a smaller position, and leverage changes your margin, not your risk. In the next lesson, you'll learn the anatomy of a trade plan. And remember, this course is education only, not financial advice.