Setting a Maximum Trading Loss

I’m willing to bet all my Apple-manufactured possessions (including my future iPad2) that at least once in your trading career, you’ve felt the need to take more trades even though you’ve already incurred more than your usual daily losses. In such instances, you often think to yourself that with more trades you will be able to offset your losses for the day.

But what if they end up being losers? Then my friend, you set yourself up for more pain and dug yourself a deeper hole to climb out of. Proper risk management crucial if you don’t want to lose your shirt, and it’s particularly important for day traders who take many trades per day because there’s a bigger chance of going on consecutive losing streaks.

There will be times that you will get so caught up in the motions of the market that you lose sight of your primary goal: to protect your capital. And this is precisely why you need to set a daily loss limit. It tells you that you’ve had enough, and that it’s time to pack it up and just call it a day.

It doesn’t necessarily mean that you are a lousy trader; there are just days when your game is off, or maybe your trading system was not designed for that day’s market environment. Just like professional athletes who sometimes underperform, traders also experience those days when they feel out of sync with the markets.

Even the great tennis player, Roger Federer (who has won 16 Grand Slam singles titles), has had his share of bad days. And it’s just too bad for you Federer Express fans that he was up against Novak Djokovic during the Australian Open semi-finals on one of those off days.

Setting a maximum trading loss per day isn’t hard. You just have to take note that it has to depend on your trading personality and risk tolerance. Here are some personal suggestions:

  1. Limit your losses to a fraction of your profit target for each day. If, for instance, you aim for a 1.5% gain each day, you can set your maximum trading loss to half of that, or .75%.
  2. If you have experience and kept a well-detailed record of your trading history (i.e. a trading journal) then you can calculate your average win per day and set your maximum trading loss to half your average gain. Let’s say your average gain per day of all your winning days is equivalent to 0.5%, then you can set your daily maximum trading loss to 0.25%.
  3. You can also set it to a fraction of a longer term number, like a max 10% loss per month. With 20 trading days a month on average, that’s 0.50% per day.

Try these out or come up with your own, and whether you choose to use one of my suggestions or not, the important thing is that you have one. The fact is all traders will eventually experience a losing day, so you should always have an intraday maximum trading loss level set.

And once you’ve reached this limit–and here’s the hard part–stop trading for the day! Instead of scrambling to come up with more unprepared trade ideas to make up for those losses, you just have to swallow your pride and admit that it’s just one of those days that you have to sit it out.

Ralph Waldo Emerson once said that, “Our greatest glory is not in never failing, but in rising up every time we fail.” So learn to accept defeat every once in a while as we need to remember that trading is a long drawn out war, and not a single battle. By protecting your ego and your account today, you have assured that the losses incurred are small enough to easily overcome tomorrow.

  • bisognor

    Thanks for the article. Us newbies can never get to many reminders about solid money management practices. In fact, I’d like to take the discussion one step further, and ask a question. How about stop loss limits in regard to a particular trading plan?

    Assuming a properly reasoned and tested trading plan or one that has worked for some period of time, should a trader limit the exposure to that system to say 50% or 60% of his/her total bankroll? Or, Should one continue and except a certain percentage chance of ruin, and continue to trade the plan if no glaring issues that would suggest weakness are apparent? Does the answer change as a trader has more money to protect? Professional vs. still working a normal job?

    Any views from long term winning traders would be appreciated.

    bisognor

  • bisognor

    Thanks for the article. Us newbies can never get to many reminders about solid money management practices. In fact, I’d like to take the discussion one step further, and ask a question. How about stop loss limits in regard to a particular trading plan?

    Assuming a properly reasoned and tested trading plan or one that has worked for some period of time, should a trader limit the exposure to that system to say 50% or 60% of his/her total bankroll? Or, Should one continue and except a certain percentage chance of ruin, and continue to trade the plan if no glaring issues that would suggest weakness are apparent? Does the answer change as a trader has more money to protect? Professional vs. still working a normal job?

    Any views from long term winning traders would be appreciated.

    bisognor

  • drpipslow

    Here in BabyPips.com, we advocate not risking money you cannot afford to lose. So unless you trade for a living, you shouldn’t risk money that could lead to financial ruin.

    Assuming you have a properly reasoned and tested trading plan, you should trade your plan. Drawdowns are natural and they happen even to the best trading systems.

    Good luck in your trading, bisognor!

  • drpipslow

    Here in BabyPips.com, we advocate not risking money you cannot afford to lose. So unless you trade for a living, you shouldn’t risk money that could lead to financial ruin.

    Assuming you have a properly reasoned and tested trading plan, you should trade your plan. Drawdowns are natural and they happen even to the best trading systems.

    Good luck in your trading, bisognor!

  • bisognor

    Thanks for the feedback. Just for clarification chance of ruin in the investment and gambling community doesn’t mean financial ruin, it referes to your bankroll reaching zero.

    If I understnd your response right, your suggesting if the money is money I have aloted for high risk investments and my plan is well thought out then I should continue. I would agree with you, but even if I am not a professional trader, If I grew my say 2-5k acount to say 20k over time, I might think about restricting my exposure to any one trading plan no matter how well thought out and succesful it had been to that point.
    I was looking for advise from traders on how much of their total trading account they would commit to a particular system and how the decision might change for the tradeer as the acount balance goes up and the trader has more to protect.

  • bisognor

    Thanks for the feedback. Just for clarification chance of ruin in the investment and gambling community doesn’t mean financial ruin, it referes to your bankroll reaching zero.

    If I understnd your response right, your suggesting if the money is money I have aloted for high risk investments and my plan is well thought out then I should continue. I would agree with you, but even if I am not a professional trader, If I grew my say 2-5k acount to say 20k over time, I might think about restricting my exposure to any one trading plan no matter how well thought out and succesful it had been to that point.
    I was looking for advise from traders on how much of their total trading account they would commit to a particular system and how the decision might change for the tradeer as the acount balance goes up and the trader has more to protect.

  • sunglow

    I have tried scalping the markets and on some days it worked like a dream, on others, nothing seemed to go right. I have given up trading that way because although it is enjoyable because of the adrenaline rush, that same adrenaline rush can lead you to make irrational trades, often with disasterous consequences. So, I think that it is good advice to put a loss limit on the day and when you have hit that limit, walk away and do something completely different. As for myself, I now prefer to follow trends over the longer term. It is less taxing on the nerves and it enables me to spend my day not having to stay glued to my screen.

  • sunglow

    I have tried scalping the markets and on some days it worked like a dream, on others, nothing seemed to go right. I have given up trading that way because although it is enjoyable because of the adrenaline rush, that same adrenaline rush can lead you to make irrational trades, often with disasterous consequences. So, I think that it is good advice to put a loss limit on the day and when you have hit that limit, walk away and do something completely different. As for myself, I now prefer to follow trends over the longer term. It is less taxing on the nerves and it enables me to spend my day not having to stay glued to my screen.

  • thetimingguy

    These are great suggestions. When I have enough trades under my belt I am going to do that.

    Until then for newbies who have not previous record to work with what I do is limit myself to 2 losses in a row then I am out for a few hours then I start the day again as if from scratch going through my pre trading list. If I loose again I’m out for the day.

  • thetimingguy

    These are great suggestions. When I have enough trades under my belt I am going to do that.

    Until then for newbies who have not previous record to work with what I do is limit myself to 2 losses in a row then I am out for a few hours then I start the day again as if from scratch going through my pre trading list. If I loose again I’m out for the day.