[[Start here]] → [[What works in stocks?|what works]] → [[maintain your discipline|discipline]] → [[when to sell]] → the 1% rule --- The "**1% risk**" rule is a very solid heuristic for sizing your positions and knowing [[when to sell]], used by many top traders and investors. It’s essential to [[keep losses small]] and protect your capital, so the idea is to cut your losses when you’ve lost 1% of your total portfolio size on any position, but let your winners run.  The first time I came across the 1% rule I was a little baffled ("_1% is so little risk… I want more!_"), but if you look at the simple maths on the size of position size losses in diversified portfolios it makes sense: - 20 stock portfolio.  5% position size.  1% risk is a 20% max stop loss per position. - 10 stock portfolio. 10% position size.  1% risk is a 10% max stop loss per position. - 5 stock portfolio.  20% position size.  1% risk is a 5% max stop loss per position. If you look at [[Minervini - Think and Trade Like a Champion|Mark Minervini]] (and his ilk of traders) ... he tends to hold 5-8 positions, and therefore promotes extremely tight stop losses (maximum 8% stop loss, equivalent to 1% risk with 8 positions).   Contrast someone like [[Slater - The Zulu Principle|Jim Slater]], another advocate of stop losses, who would tend to hold 12 positions or so, and keep losses small at about a 15% max stop loss (about 1.25% risk). So acceptable stop loss sizes are very dependent on the number of holdings, given the 1% risk rule.  I'd also say that highly concentrated portfolios ought not to play in small/micro caps, as it's almost impossible to keep to the 1% risk rule when holding just a few highly volatile stocks. Here’s a graphic that illustrates the principle. ![[the-1-percent-rule.png]] > [!info] Rule of Thumb > In an equal weighted portfolio, a percentage stop-loss level that risks 1% of your capital equals your number of holdings. (e.g. 25 holdings → 25% stop loss ) ## Volatility sizing positions with the 1% risk rule You don’t have to couple this rule with an exact target number of positions. Some investors will start with 1% risk, assess the volatility of an investment and then calculate a position size. This aligns with the idea that [[stop loss levels should scale with volatility]] - you often need wider stops in more volatile investments to avoid getting stoppped out too early. For example, let’s say you plan to hold an investment for a year. * The typical 1 year volatility (standard deviation) of the share price is about 30%. Given this, you might consider cutting losses at half the annual volatility - or at a 15% stop loss. * If your portfolio size is £100k, the 1% risk rule is a £1000 loss. * Divide that £1000 by the 15% stop loss size → which implies a £6.66k position size. A more volatile position (50% annual volatility) might require a wider stop (at 25%), which implies smaller position size (£4k) to imply the same level of risk, whereas a less volatile stock (25% vol) can get away with a tighter stop (12.5%) implying a larger position size (£8k). Of course, if you are really good at timing your entries, you may be willing to set tighter stop loss levels, which then imply larger position sizes. So the 1% risk rule is very flexible. ## Alternatives to the 1% risk rule Some investors/traders flex this rule, risking from 0.5% up to 2% on a single position. But you should beware that the risk escalates significantly above 1% and drawdowns can be more severe. Ultimately, 2% risk would imply double the stop loss levels of the 1% rule. i.e. a 5 stock portfolio → 10% stop loss. For most investors, it’s not recommended to go above 1% risk. Always protect your capital!