When I place a spot forex trade for 100 shares, it says margin used $5.00. This is 1% of my $500 practice trade account.

My question is should the 1% rule be applied to my margin, or should it be applied to the $500 in the account?

The 1% rule relates to the amount that you risk on each trade, not your margin..

The distance between your stop and your entry defines the $ risk, and combined with your account size and risk % you can determine how many contracts to trade.