Forex trading is not only about the possibility of making high profits, but also about the importance of proper risk management. In this context, one of the most effective tools for risk management is the 1% rule. The essence of this rule is that on each trade a trader risks only 1% of his total trading capital. This means that if you have $5000 in your trading account, you will risk $50 on every single trade.
Why do I Need the 1% Rule?
The 1% rule is designed to ensure sustainable capital growth and minimize losses. Using this rule, even a series of unsuccessful trades will not significantly reduce your trading capital. For example, even after 10 consecutive losing trades, you will still have 90% of your original capital. This greatly reduces the pressure and allows the trader to remain calm and objective in decision making.
How to Apply the 1% Rule?
The application of the 1% rule is relatively simple and standardized. You need to calculate 1% of your total trading account size on the broker’s platform and set this amount as the maximum allowable risk per trade. This can be done manually or using the automated features of most trading platforms. It is important to remember that the risk amount must be recalculated each time your account balance changes – for example, with RoboForex – https://revieweek.com/review/roboforex/.
Pros and Cons of the 1% Rule
Like any trading approach, the 1% rule has its advantages and disadvantages. On the one hand, it offers an excellent risk management mechanism, allowing you to preserve a large part of your capital even in case of a series of unsuccessful trades. On the other hand, with a small trading account size, 1% may be too low a rate, slowing down the accumulation of profits.
Tips for Using the 1% Rule
The 1% rule is a good start, but risk management is not limited to it. Here are some tips for using it:
- Don’t ignore the other aspects of risk management. Use stop losses, watch asset correlations, and don’t forget diversification.
- Take your trading strategy into account. If your strategy involves a high probability of success, you may want to consider increasing your risk percentage.
- Keep in mind your psychological comfort. If 1% risk makes you constantly worried, reduce it to a level at which you feel comfortable.
The 1% rule is a universal risk management tool that can be adapted to any trading strategy and any trading account size. It serves as a basis for capital preservation and growth, creating the foundation for long-term success in Forex.