Position Sizing and the 1% Rule

Position sizing answers one question: given how much you're willing to lose on this trade, how large should the trade actually be? Get this wrong and even a "correct" trade idea can do serious damage to your account.

The 1% rule is a common starting point: never risk more than 1% of your account balance on a single trade. If your account is $1,000, that's a maximum $10 loss if your stop-loss is hit — regardless of how big the position itself is.

To size the trade, you work backwards from your stop-loss distance: a wider stop means a smaller position size for the same dollar risk, and a tighter stop allows a larger position for that same risk. This is why position size and stop-loss placement should always be decided together, never separately.