Risking 1% vs. Using 1%: Two Different Position Sizing Strategy

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The concepts of risking 1% of your capital and using 1% of your capital as a position size are often confused, but they represent two very different approaches to position sizing.

Risking 1% of Your Capital
When you risk 1% of your capital, it means you are willing to lose 1% of your total capital if the trade goes against you. To calculate the position size in this case, you consider the stop-loss level. For example, if your total capital is $10,000 and you’re risking 1%, that means you’re prepared to lose $100 on the trade. The position size is then calculated based on how far your stop-loss is from your entry price.

Example:
- Capital: $10,000
- Risk per trade: 1% = $100
- Stop-loss distance: 5% from entry price
- Position size: $100 / 5% = $2,000

So, the position size would be $2,000, but the actual amount at risk is only $100 due to the stop-loss.

Using 1% of Your Capital as Position Size
In this approach, you're directly using 1% of your total capital to buy into a position. It doesn't take into account the risk or the stop-loss distance. If your capital is $10,000, using 1% as your position size means you're buying $100 worth of the asset, regardless of the potential risk.

Example:
- Capital: $10,000
- Position size: 1% = $100
- This $100 is your total investment in the trade, no matter where your stop-loss is.

Key Difference:
-Risking 1% focuses on how much you are willing to lose and adjusts the position size accordingly based on the stop-loss. It’s a risk management strategy.
- Using 1% is simply allocating a fixed percentage of your capital to each trade, without considering the specific risk on that trade.

They may sound similar, but one is risk-based, and the other is simply about investment allocation.