Published on: 2026-09-09
Updated on: 2026-09-09
Larry Hite’s 1% risk rule limits the planned loss on any single trade to roughly 1% of total account equity. It does not mean committing only 1% of the account to the position itself.
The rule is closely tied to Hite’s work at Mint Investment Management, where containing individual losses ranked above extracting the maximum return from any one idea. He described 1% as the firm’s ceiling on a single trade.
The appeal is obvious, since a trader can be wrong repeatedly without one position deciding the fate of the account. What the rule governs is risk, and it offers no promise of profitability.
Risk, not size. The 1% limit caps the planned loss if the stop executes. The market value of the position can be several times larger than 1% of equity.
Stop distance sets the position. Divide the dollar risk allowance by risk per unit. A tighter stop allows more units at the same account risk, which is why you must choose the exit level before the quantity.
The percentage is fixed; the dollar figure is not. Fixed fractional sizing recalculates against current equity, so risk shrinks automatically through a drawdown and expands as the balance recovers.
Losing streaks cost less at lower risk. Ten consecutive losses take roughly 9.6% off the account at 1%, against about 18.3% at 2% and 40.1% at 5%.
Four 1% trades are not necessarily four independent risks. Correlated positions can respond to the same dollar, rate or sentiment shock, and correlations tend to tighten precisely when markets are under stress.
Planned loss differs from realised loss. Gaps, thin liquidity, widening spreads and slippage can push the exit beyond the intended level, particularly on leveraged products held overnight.
Sizing does not create an edge. A negative-expectancy strategy traded at 1% loses capital more slowly rather than turning profitable, so expectancy and payoff economics still need to stand on their own.
Hite co-founded Mint Investment, a prominent commodity trading adviser of the 1980s, and his approach reached a wider audience through Jack Schwager’s Market Wizards. The rule reduces to one line of arithmetic.
Maximum planned loss = Account equity × Risk percentage
For a $10,000 account that produces $100 of permitted loss, and the position is built so a normal stop-loss execution costs roughly that amount. The operative word is risk rather than size, because the allowance says nothing about notional value, which could run into thousands depending on entry price and stop distance. That separation between capital at risk and capital exposed is the foundation of the framework.
Take a trader with $10,000 who caps planned loss at $100. A stock trades at $50 with a stop at $48, so risk per share is $2 and the allowance permits 50 shares. That position is worth $2,500, placing 25% of the account in the market while only 1% is at risk.
Move the stop to $49.50 and risk per share drops to $0.50, so the same allowance supports 200 shares worth $10,000 at entry. Account risk has not moved, yet position value has quadrupled. Percentage risk means little until the trader defines where the idea is wrong.
The general formula works in only one direction.
Position size = Maximum account risk ÷ Risk per unit
With $50,000 of equity and a 1% limit, maximum planned loss is $500. If entry and stop sit $5 apart, that permits 100 shares. The logic scales with the account.
| Account Equity | Risk Per Trade | Maximum Planned Loss |
|---|---|---|
| $5,000 | 1% | $50 |
| $10,000 | 1% | $100 |
| $50,000 | 1% | $500 |
In forex, the calculation substitutes stop distance in pips and pip value, but the sequence stays the same. Traders can calculate position size from equity, risk percentage and stop distance rather than picking a lot size first.
Sizing then adjusts automatically as equity moves: smaller after a drawdown, larger as the balance recovers.
Fixed fractional sizing recalculates each new 1% against remaining equity rather than the original balance. Starting from $10,000, ten consecutive losses leave $10,000 × 0.99¹⁰ ≈ $9,044, a drawdown of about 9.6%. Twenty losses leave roughly $8,179, or 18.2% down.
The gap between risk settings widens quickly as the percentage climbs.
| Risk Per Trade | Equity After 10 Losses* | Approx. Drawdown |
|---|---|---|
| 0.5% | $9,511 | 4.9% |
| 1% | $9,044 | 9.6% |
| 2% | $8,171 | 18.3% |
| 5% | $5,987 | 40.1% |
A 5% allowance turns the same sequence into a 40% hole, which then demands a 67% gain to recover. Small fractional risk prevents no losing streaks. It slows the rate at which they consume the capital needed to keep trading.
Stop placement should reflect the trade logic before size enters the conversation. Holding planned loss at $100, a $1 stop supports 100 units, a $2 stop 50 and a $5 stop 20, so a wider stop is not inherently riskier provided the position shrinks in proportion.
Tightening a stop purely to justify a larger position changes the trade into something else, because the exit no longer marks the point where the idea fails. Where volatility argues for more room, the sensible adjustment is a smaller position. Average true range helps gauge normal movement, though no single method fits every strategy.
At portfolio level, the rule needs supervision. Consider four positions, each at 1%: long EUR/USD, long GBP/USD, long gold and long a growth-heavy equity index. On paper, these are independent trades, yet all four can respond to the same dollar move, rate repricing or shift in sentiment. Every position respects the rule while the book carries one concentrated bet.
This is where forex correlation and portfolio heat earn their place. Heat measures combined planned risk across open positions, while correlation shows how much of it answers to one driver, and many correlation guide explains how pairs sharing a currency or macro theme travel together.
Correlations can rise during market stress, as liquidity pressure and deleveraging overwhelm asset-specific fundamentals.
The logic transfers cleanly to leveraged products, while the execution risks do not disappear. A trader may post only a fraction of a CFD’s notional value as margin, yet account risk still derives from the loss between entry and intended exit. Leverage sets how much exposure capital can control, not how much should be risked. A 20-pip stop might represent 1% at one position size and 4% at another.
One limitation deserves respect: a stop defines a planned loss rather than a guaranteed realised one. Gaps, thin liquidity, widening spreads and slippage can deliver a fill beyond the intended level, so risking 1% on paper does not mean every loss closes there.
Position sizing controls the consequences of being wrong and cannot turn negative expectancy into positive returns. The relationship is captured directly.
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)
A method winning 40% of the time, earning 2R on winners and losing 1R on losers produces (0.40 × 2R) − (0.60 × 1R) = +0.20R, positive before costs. Another system might win 70% of the time and still bleed capital if losses run several times larger than wins.
Account risk therefore belongs in a separate column from the risk-reward ratio: one caps the damage from a single position, the other weighs potential loss against potential gain.
Nothing about the number one is inherently optimal. Schwager noted that 0.5%, 2% or another controlled figure could suit a given strategy, with the presence of a strict limit carrying the real weight.
A lower setting may be appropriate for unusually volatile instruments, books where positions overlap heavily, significant gap risk or strategies with limited live history. The appropriate figure sits inside a portfolio framework, since one open idea carries very different aggregate exposure from ten.
The rule limits position damage under its own assumptions and corrects nothing about decision quality. Several exposures remain untouched:
gaps beyond stops, slippage and poor liquidity;
excessive correlation across open positions;
badly chosen exits and accumulating trading costs;
strategy deterioration and emotional overrides of the plan.
Hite’s broader philosophy combined small individual risk with extensive diversification, while Mint also considered the correlation between its systems rather than treating every position as independent.
A workable sequence runs from the account to the ticket:
Take current equity and set the maximum percentage at risk.
Identify the price at which the trade idea becomes invalid.
Measure the distance in money between entry and that level.
Divide the risk allowance by risk per unit to size the position.
Check open trades for correlated exposure and review portfolio heat.
Allow for spreads, slippage and gaps, then recalculate as equity changes.
The order carries the discipline: risk first, size second. Picking a preferred trade size and then shifting the stop until the numbers cooperate reverses the reasoning that made the framework durable.
The lasting value of Hite’s rule is that it reorders how a trade gets built. Rather than deciding what size looks attractive and examining the downside afterwards, the potential loss is fixed first, and everything else follows from it.
The percentage remains flexible, while the durable principle is that no single trade should decide whether the account survives. Define the loss, place the stop, calculate the size, then check how that exposure fits alongside everything already open.
