The Trading Guide Part 1- Daily Loss Limit
Trading can be a cut throat industry, and with all the different opinions and strategies available, it can be overwhelming when you start. If you are new to trading there are a few simple rules you can follow that will greatly increase the likelihood of surviving and succeeding.
One of these rules is that the size of your account should reflect funds that you can afford to lose. This is so that in the unfortunate case of having a losing streak, you are not taken out of the game and can recover. We sometimes focus so much on wins that we can sometimes forget that successful trading is about growing your account with steady gains and managing your risk.
We recommend setting a limit of 5% of your account on any given trading day-so once you have lost 5% of your current account balance, you need to step away from trading for the rest of that day.
This is because often once we lose once, our emotions take over, due to loss aversion , so we can enter into recklessness or revenge trading. Suddenly one manageable loss has spiralled into blowing up your account. Having a 5% limit ensures this doesn’t happen and your account is safe to trade another day.
For example, ff your account is $10,000, then your limit will be $500. If you have a bad day and lose, you will stop after losing 5%, and then the next day you adjust your daily loss limit to reflect your next account balance. So day 2, your new daily loss limit is $475 instead of $500.
Hypothetically, if you don’t adjust every day for your new account size, your account would be exhausted after 20 days.
Adjusting your Daily Loss Limit to your new account size, will keep your account alive for more than triple the unadjusted time.
Using this Guardrail will not only keep your account alive much longer, it will allow you the opportunity to calmly reassess your trading strategies and avoid emotional, irrational and reckless responses.
You will also adjust your daily loss limit if you have won money the daily before, so you will have more money to risk, which allows you to confidently grow your account and to take advantage of your hard work and accumulated profits.
So, to recap:
1. Set your Daily Loss Limit and revisit it regularly as your balance changes.
2. Learn when to stop trading on the bad days.
3. Revise your Daily Loss Limit if your account gets smaller.