Position sizing and risk: the 1 per cent rule revisited

Here is a question almost nobody asks before they buy something: how much am I allowed to LOSE on this? Everyone has an answer ready for the other question, the fun one. How much could I make? They have done that maths in the shower, with optimism cranked to eleven. The boring twin question, the one about the downside, gets a shrug and a vibe. And that shrug is precisely how perfectly clever people blow up a perfectly good book on a single bad idea.

This is a post about the 1 per cent rule for investing, which is really a post about risk per trade. Not how much you stake. How much you can afford to lose if you are wrong, which you will be, regularly, because that is the job. Position sizing risk is the one lever you actually control, and the finance industry would rather sell you conviction than teach you subtraction. Let me make the case for subtraction. (This is a way to think, not advice about your money. Nobody here knows your situation. Use your own head.)

What the 1 per cent rule actually says

The rule is almost insultingly simple, which is why it works and why people ignore it. On any single position, you risk no more than a small fixed slice of your whole book. One per cent is the classic number. Some people run a bit higher, some lower. The exact figure matters less than the discipline of having one and obeying it.

Notice the word risk. The rule does not say “put 1 per cent of your money in”. It says “lose no more than 1 per cent of your money if this goes against you”. Two completely different sentences, and the gap between them is the whole game. You can have a large position with small risk, or a small position with large risk, depending entirely on how far the price can fall before you admit defeat. The position size is an output. The risk is the input you choose.

Run the arithmetic on why one per cent is so calming. Say your book is 100,000 of whatever currency you like (a round number for the example, not a recommendation and not a real account). One per cent is 1,000. Lose that and you are down one per cent, which is a Tuesday, not a catastrophe. You could be wrong ten times in a row, a genuinely humiliating streak, and still have most of your book intact and your hands steady. The rule does not stop you being wrong. It stops being wrong from being fatal.

Risk per trade is not the same as position size

This is where most people quietly cheat themselves. They hear “size your positions” and reach for a percentage of the book. Ten holdings, ten per cent each, job done. That feels tidy. It is also nonsense, because it treats a steady blue-chip and a lottery ticket as the same animal just because they cost the same to buy.

The thing that varies wildly between positions is not the amount you commit. It is how much of that amount is genuinely at risk. A holding you would abandon after a five per cent drop and a holding you would ride down forty per cent before crying uncle carry completely different risk for the same money on the table. Sizing by “percentage of book” ignores the only number that decides whether a mistake is survivable, which is the distance between where you got in and where you get out.

So flip the order. Decide the loss first. Then let the loss, plus the distance to your exit, tell you how big the position is allowed to be. Excitement does not get a vote. Excitement is the thing that needs supervising.

Size the position off your invalidation level

Here is the bit that turns a slogan into a method, and it leans on something you should be writing down anyway: the level at which you would admit the idea is wrong. Your invalidation signal. The price, or the broken assumption, that means the thesis you bought is no longer true. If you have never written one, that is the real homework, and we have a whole piece on when to sell and how invalidation works.

Once you know where you are wrong, sizing is just division. Your risk budget for the trade, divided by the distance from your entry to your invalidation level, gives you the size. Pretend, purely as an example, that your budget is 1,000 and you would call the idea dead if the price fell twenty per cent from where you buy. Twenty per cent of the position equals 1,000, so the position is 5,000. Same budget, but the idea only breaks on a five per cent fall? Then five per cent equals 1,000, and the position is 20,000. Tighter invalidation, bigger position, identical risk. Wider invalidation, smaller position, identical risk. The book never feels the difference, which is the entire point.

This also kills the daftest habit in investing, which is moving your exit because you have grown fond of the position. The invalidation level is set when you are calm, before money is on the line and your judgement is for sale. The size follows from it. Shift the exit later to dodge a loss and you have not been brave, you have just torn up the only number that was protecting you.

Survivability beats being right

People badly want investing to be about being right. It is mostly about not being ruined while you are wrong, which is a less flattering story and a much more useful one. The 1 per cent rule is a survivability rule wearing an arithmetic costume. Cap the damage from any single position and no single position can take you out, no matter how confidently you walked into it.

There is a quiet psychological dividend too. When the worst case is “down one per cent and mildly annoyed”, you stop white-knuckling every wobble. You can let a thesis actually play out, because the position is small enough that a bad week is not an emergency. Most panic selling looks like a failure of nerve, when usually it is a failure of sizing wearing that disguise. Fix the size and a lot of the fear simply has nowhere to live. Treating risk as a fixed, deliberate input is the core of the discipline loop, and it is the difference between a process and a series of moods.

Review your realised R, not just your wins

A rule is only worth having if you check whether you kept it, which means measuring trades in the currency of risk rather than money. The handy unit is R. One R is the amount you put at risk on a trade. If you risked 1,000 and made 3,000, that is plus three R. If you took the full loss, that is minus one R. Counting in R instead of currency strips out position size and shows you the only thing that matters across a messy book of different bets: how much you make per unit of risk.

The reason to log realised R, trade by trade in a journal, is that it catches the lies you tell yourself. A run of small wins can hide a habit of running losses past your invalidation level, where one ugly minus-three-R trade eats a dozen tidy plus-half-R ones. Currency hides that. R exposes it instantly. You see, in black and white, whether your losers are actually staying near minus one R like the rule promised, or quietly bloating because you keep flinching. A regular look at this is exactly what belongs in a quarterly portfolio review, next to all the other things you would rather not examine.

Where Strata fits

None of this needs software. You can do it on paper, and people did for a century. What software buys you is that the discipline survives contact with a busy life, because the numbers sit in one place and stop being optional. In Strata a thesis holds your sizing and your invalidation signals as proper, reviewable objects, so the level you would exit at is written down before you are emotionally compromised rather than improvised after. The journal records realised R as you close trades, so the review above is a thing you read instead of a thing you dread. The book is yours, entered by hand, read-only and credential-free, which means the risk numbers you are staring at are ones you can actually stand behind.

The 1 per cent rule will not make you right more often. Nothing will. What it does is guarantee that being wrong, the unavoidable tax on doing this at all, stays a cost you can pay rather than a hole you fall into. Decide the loss first. Size off where the thesis breaks and keep your tally in R, and then no single mistake gets to write the ending. If that sounds like the standard your money deserves, you can build your portfolio and start sizing on purpose.