The best strategy in the world won't save you from blowing up an account if you size positions wrong. The opposite is also true: a mediocre strategy with disciplined sizing can compound for years.
This article is the math and the mindset behind not betting too much on any one idea.
The 1% rule (and when it's wrong)
The classic rule: never risk more than 1-2% of your account on a single trade.
If your account is $10,000:
- 1% = $100 max loss per trade
- 2% = $200 max loss per trade
That doesn't mean you only buy $100 worth of stock. It means: if your trade hits its stop loss, you only lose $100.
Suppose you buy a stock at $50 and plan to stop out at $45. Your risk per share is $5. With $100 of total risk, you size at 20 shares ($1,000 position).
The rule isn't about position size. It's about loss size.
Why this matters mathematically
If you lose 1% on a bad trade, you need a 1.01% gain to recover. Easy.
Lose 50% of your account, and you need a 100% gain to get back to even. That's career-ending math.
Look at the asymmetry:
| Loss | Gain needed to recover |
|---|---|
| 10% | 11% |
| 25% | 33% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |
Stay in the top row of that table at all costs. The bottom rows are where traders quit.
Position sizing for options
Options are leverage. One contract = 100 shares of exposure. Sizing matters even more.
For premium sellers (selling cash-secured puts or covered calls):
- Treat each contract as if you'll be assigned. Can you actually afford 100 shares of this stock at the strike price?
- Don't sell more contracts than you have cash to back. Margin gets ugly fast.
- Apply the 1% rule to the worst-case loss, not the premium collected.
Example: you sell a put on a $50 stock at the $48 strike for $1.00 premium ($100/contract).
- Premium collected: $100
- Worst case: stock goes to $0, you get assigned at $48 = $4,700 loss after the premium
- For a $10,000 account, this single contract is 47% of your account at risk. Way too big.
A more reasonable sizing on that account: maybe one put contract on a $10 stock, or buy a put spread to cap the downside.
The four-bucket framework
Once you've got the 1% rule locked in, you can layer in more sophisticated sizing:
- Core positions (40-60% of account) — Highest conviction, longest hold, smallest position changes. Boring blue chips, index ETFs, your main income wheel.
- Tactical positions (20-30%) — Medium conviction, weeks-to-months hold. Earnings plays, sector rotations, specific setups.
- Speculative (10-15%) — High conviction, short timeframe, OK if it goes to zero. Single-stock momentum, lottery options, etc.
- Cash (5-20%) — Always have powder dry for opportunities. A position you can't enter is the same as a position you didn't take.
If you blow up the speculative bucket, the core is fine. Survive to trade another day.
What to actually do
- Decide right now: what's your max per-trade risk? Write it down. 1% is conservative, 2% is aggressive, anything more is gambling.
- Before every trade, calculate your stop loss and the dollar amount you'd lose if it triggers.
- Divide your max risk by your per-share risk to get the share count.
- If the math says "I can only afford 7 shares," that's the right answer. Don't round up to 100.
The discipline to size correctly is more important than the discipline to pick correctly. You can survive being wrong if you're small. You can't survive being big and wrong.