Position sizing, the 1% rule and R-multiples, explained simply
Why traders talk in “R” instead of dollars, how to size a trade from its stop, and what a 1% risk rule really limits — and what it doesn’t.
5 min read · updated October 30, 2026
Two traders buy the same stock at the same price. One loses 0.5% of the account when it fails; the other loses 8%. The setup was identical — the difference was the size. Position sizing is the part of trading you control completely, and it decides whether you survive a run of losses.
What “R” means
R is the amount you planned to lose on a trade: the distance from the entry to the stop, times the shares. If you buy at $50 with a stop at $48 and 100 shares, 1R is $200.
Results are then measured in R. A trade that makes $600 made 3R; one stopped out lost 1R. Talking in R makes trades comparable across stocks and account sizes, and it exposes the real question: are your wins, in R, big enough and frequent enough to pay for your losses?
The 1% rule
A common rule is to risk no more than about 1% of the account on any single trade — that is, set 1R to 1% of the account. On a $20,000 account that’s $200 per trade.
Shares = (account × 1%) ÷ (entry − stop). With $200 to risk and a $2 stop, that’s 100 shares; with a $0.50 stop, 400 shares. The dollar risk stays the same; the share count adjusts.
What the 1% rule doesn’t protect you from
- Gaps: if a stock opens below your stop, the loss is bigger than 1R. Earnings and overnight news are the usual cause.
- Correlation: five breakouts in the same sector are closer to one big trade than five small ones.
- Slippage and fees: fast markets fill stops worse than the stop price.
- Losing streaks: ten 1% losses in a row is 10% down. Streaks like that happen to every method.
Expectancy in one line
Expectancy = (win rate × average win in R) − (loss rate × average loss in R). A method that wins 40% of the time with an average win of 2.5R and an average loss of 1R has an expectancy of 0.4 × 2.5 − 0.6 × 1 = +0.4R per trade — before costs, and only if those numbers hold in the future, which no one can promise.
Questions
What does 1R mean in trading?
1R is the amount you planned to risk on a trade: the distance from your entry to your stop, multiplied by the number of shares. A 2R gain is twice that amount.
Does the 1% rule mean a 1% stop?
No. The 1% is how much of the account you risk, not how far away the stop is. The stop sits where the setup is wrong; the share count is then chosen so hitting that stop costs about 1% of the account.
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