Investor’s One Percent Risk Rule

Investors often follow the “one percent rule” to minimize their investment risk on any given single trade. So an investor, or stock trader, with a portfolio worth $100,000 would never make a trade that would put more than $1000 at risk of being lost per trade.

This keeps the maximum potential loss of a single trade at an acceptable level so no single trade will severally impact the investor’s portfolio. Traders and investors who us the one percent rule are less likely to be severally impacted by an unexpected losing streak compare to the person the risk a forth or more of their portfolio.

Two Step Calculation

The one percent risk calculation is a two-step process. Determine how much capital can be at risk, and then calculate the size of the trade:

1. amount to risk = portfolio value / 100
2. size of trade = amount to risk / ((purchase price – stop loss) x point value)

So if you were to purchase $75 stock in a $100,000 portfolio with a stop loss point of $70 the one percent rule would be calculated like this:

1. amount to risk = $100,000 / 100 = $1,000
2. size of trade = $100,000 / (($75 – $70) x 1 = 200 shares

In our example 200 shares is the trade size since the the shares could trade at the stop loss point and lose $5 each, totaling 1% of the portfolio.

Let’s do another example using a smaller portfolio:

1. amount to risk = $35,000 / 100 = $350
2. size of trade = $350 / (($40 – $35) x 1 = 70 shares

Summary

The one percent rule can be used in all types of markets (stocks, furtures, options, etc.). However, it is important that you use the correct point value (1) or you will risk losing much more than one percent.

What about you, do you have any trading tips to share? Leave them in the comments.