What is the 1% rule in trading?

The 1% rule in trading is a risk management principle that suggests risking no more than 1% of your trading capital on a single trade. This rule is designed to help traders protect their capital and manage risk effectively. Here's how it works:

Determine Your Risk Tolerance:
- Before entering a trade, decide on the percentage of your total trading capital that you are willing to risk on that particular trade. The commonly recommended threshold is 1%.
Calculate Position Size:
- Once you have determined the percentage you are willing to risk, calculate the position size accordingly. This involves determining the dollar amount (or your account's base currency) that represents 1% of your total capital and then calculating how many units or lots of the currency pair you are trading can be purchased or sold with that amount.
Place Stop-Loss Orders:
- Set a stop-loss order at a level that, if triggered, would result in a loss equal to the predetermined percentage of your trading capital. This stop-loss level is determined based on the price levels and technical analysis relevant to the trade.

By adhering to the 1% rule, traders aim to limit the potential loss on any single trade, thus preventing a large drawdown in their overall trading capital. This risk management strategy helps traders survive periods of losses and provides a disciplined approach to trading.

It's important to note that while the 1% rule is a widely accepted guideline, individual traders may have different risk tolerances, and some may choose to adjust the percentage based on their preferences and trading strategies. The key is to establish a risk management plan that aligns with your financial goals and comfort level, and to consistently apply it to each trade.