Position sizing: the 1% rule, step by step

Most traders who blow up an account don't do it with one bad idea. They do it with a reasonable idea and a position that was far too big. The cure is boring, mechanical and it works: decide what you can lose first, then size the trade from it.

Step 1: Decide your risk per trade

Pick a fixed percentage of your account that you're willing to lose if your stop loss is hit. Most professional traders stay between 0.5% and 1%.

Risk amount = Account balance × Risk %

With €5,000 and 1% risk, the most you lose on any single trade is €50. Not "about €50". Exactly €50 (plus costs).

Step 2: Put the stop where the idea is wrong

The stop loss is not a number you choose to make the position bigger. It goes where your trade idea is invalidated: beyond the swing low for a buy, beyond the swing high for a sell, or on the other side of the level you're trading.

Measure the distance from entry to stop. That distance is your risk per unit.

Step 3: Turn it into a lot size

For gold (XAUUSD), one standard lot is 100 ounces, so a $1 move is worth $100 per lot.

Lots = Risk amount in USD ÷ (Stop distance in $ × 100)

Example. €5,000 account, 1% risk = €50. With 1 USD = 0.92 EUR that is about $54.35. You buy at 2,650 with a stop at 2,642, a distance of $8.

Lots = 54.35 ÷ (8 × 100) = 0.068 → round down to 0.06 lot. If the stop is hit you lose 8 × 100 × 0.06 = $48, inside your limit.

Notice what happened: a wider stop automatically means a smaller position. Your money at risk stays the same whatever the chart looks like.

Why 1% and not 5%?

Because losing streaks are normal. With a strategy that wins 50% of the time, a run of 6–8 losses in a row will happen sooner or later.

At 1% a bad week is an annoyance. At 5% it's a hole that takes months to climb out of.

Common mistakes

• Sizing by feel ("I'll take 0.5 lot, it feels right"). The chart decides the stop, the stop decides the size.
• Moving the stop further away to avoid being stopped out. That silently increases your risk.
• Forgetting the costs. Spread and commission come on top of the stop distance.
• Rounding up. Always round the lot size down.

Make it automatic

Write your risk % on a sticky note and work out the lot size before every trade, not after. Our free Gold Risk Management Cheat Sheet has the formulas, worked examples and a printable pre-trade checklist.