Lessons › Why traders lose › The daily loss limit
World 11 · Why traders lose · lesson 26 · level 2
The daily loss limit
Pick your daily loss limit before the day starts, and stop trading the moment you reach it, every single time.
In one line
One bad trade, sized right, costs a little. A bad day with no end can cost the whole account.
Explained simply
A daily loss limit is the most you let yourself lose in one day. You pick it before the day starts, while you are calm: for example, 2% of your account or three losses in a row, whichever comes first. Say each trade can lose 1% if its stop, the price where you give up, is hit. Then two losing trades reach a 2% limit, and the day ends while the damage is small. The hard part: when you hit the limit, you stop. No "one more" to get back to even.
A worked example
An example account of $10,000. Each trade can lose 1%, so $100, if its stop is hit. The daily limit is 2%, so $200: two losing trades reach it, and the day ends. Three losses in a row would be 3%, or $300. In a fast market a stop can fill a little worse than planned, so the limit keeps the day small, not exact.
Mistakes to avoid
- Picking the limit after the losses have started.
- Taking one more trade to get back to even after the limit is hit.
- Keeping the same limit but making each trade bigger.
- Stopping at the limit on some days and not on others.
Check yourself
When should you pick your daily loss limit?
Before the day starts. Pick it before the first trade, while you are calm. In the middle of a bad day, the loss would pick it for you.
Each trade can lose 1% of the account. How many losing trades reach a 2% daily limit?
Two. Two losses of 1% each make 2%. The day ends while the damage is small.
You hit your limit, and one more trade could get you back to even. What do you do?
Stop and close the trading app. The limit only works if hitting it ends the day, every single time. "Just one more" is how a bad day loses its floor.
A $10,000 account risks 1% per trade and sets a 3% daily limit. What is the most the day is planned to lose?
$300. 3% of $10,000 is $300: three losing trades of $100 each. Then the day ends.
Your limit is 2% of the account or 3 losses in a row, whichever comes first. Each trade risks 1%. When does the day end?
After 2 losing trades. Two losing trades at 1% each reach 2% before a third loss can happen, so the 2% limit ends the day first.
Goal of this lesson: Set a daily loss limit before your first trade, and work out how many losing trades reach it.