Experienced traders often practice a strategy that helps them minimize their losses along with bringing out the most profitable trades possible. This strategy is known among traders as the 1 percent rule.
The idea behind this rule is to minimize losses and ensure that after a loss, traders can get back without needing to worry about having enough capital. The 1 percent rule is an essential part of a trader’s journey as it helps minimize the losses and prevents the traders from losing a major amount of their capital.
As mentioned in the name, the 1 percent rule refers to traders allocating 1 percent or close of their total account balance for a single trade or asset. Using different tools and calculations, traders find the best amount to put forward and what price to buy, along with setting a stop-loss order to close trades as soon as the asset falls below a specific amount.
This helps in minimizing the losses since just one percent of the total account value was lost, meaning that there is still a major amount of capital left to trade with.
Professional traders follow this strategy for several reasons. First and foremost, it protects the capital. It protects large losses from affecting the trader’s capital amount. Meaning that even if the trades didn’t work out, the trader still has enough capital left over to keep on trading for a while longer.
The 1 percent rule also helps in minimizing the psychological effects of multiple losing trades in a given time. The small percentage of capital lost will not affect the trader as much; hence, the trader will remain hopeful and confident in his strategy and approach. It also promotes slow and steady growth of a portfolio and prevents over-leveraging, which beginner traders often make the mistake of doing.
Apart from that, it enables trading accounts to slowly compound their gains and improve their portfolio exponentially.
To implement the 1 percent rule in trades, traders need to follow the following steps:
For example, if an account has $10,000, the trader can afford to lose 1% or $100 in a single trade.
After analyzing the market volatility and the trends, calculate the stop-loss value at which the trade will be closed if the share price falls below the given amount. For example, if the trader is looking to purchase a specific security at $50 per share. The trader then sets the stop-loss at $48.
Calculate the number of shares to buy based on the stop-loss amount. For example, if the affordable loss amount is $2 per share ($100 risk ÷ $2 per share), then the trader can afford to purchase 50 shares.
While implementing the 1 percent rule, traders might encounter some problems and make mistakes along the way.
Some traders might miscalculate the position size due to human error or because of using the wrong formula to find the affordable loss per trade. The solution is simple: use the correct formula to calculate the amount that an account can afford to lose without being affected.
Some traders might also overlook market conditions and forget to follow trends in the present market, which might lead to premature stop-loss and exits, which may make the trading strategy inefficient. Some traders might also forget to refresh their 1 percent after trades, meaning that they're still using the initial starting amount as their base.
In conclusion, the 1 percent rule is a cornerstone of professional trading and can ensure capital protection, maintain discipline among traders, support compounding growth, and, most importantly, regulate psychological stability and reduce the risk of capital loss to a low of 1 percent per trade. Furthermore, the 1 percent rule is essential to mastering the risk management technique as, at the end of the day, the real challenge is not winning in the trade but rather staying consistent and letting the account compound profits over time. This is the kind of disciplined approach Mockapital encourages for its traders, providing a risk-controlled environment that fosters growth and consistency without the pressures of real capital.
