Ever watched yourself spiral into a trading abyss, convinced the next trade will save you from today’s bloodbath?
At least once in your trading career, you’ve probably 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.
When “Just One More Trade” Becomes Your Worst Enemy
Proper risk management is crucial if you don’t want to lose your shirt, and it’s particularly important for day traders who make many trades per day because there’s a bigger chance of going on consecutive losing streaks.
There will be times when 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.
Even great athletes such as Roger Federer, Stephen Curry, or Lionel Messi have had their share of bad days.
Just like professional athletes who sometimes underperform, traders also experience those days when they feel out of sync with the markets.
Setting a maximum trading loss per day isn’t hard. You just have to take note that it depends on your trading personality and risk tolerance.
Why Loss Limits Aren’t Just For Rookies
Risk management isn’t sexy, but neither is blowing up your account.
For day traders especially, the danger is real, like trying to juggle chainsaws while riding a unicycle. One bad streak and suddenly you’re down 30% before lunch.
Even when you’re “in the zone,” the market has an uncanny ability to remind you who’s boss. This is exactly why your daily loss limit isn’t negotiable. It’s your emergency brake when trading judgment goes on vacation.
Here are some personal suggestions:
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%.
Set your maximum trading loss to half of your average gains.
If you have experience and keep a well-detailed record of your trading history, 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%.
You can also set it to a fraction of a longer-term number, like a max 10% loss per month.
Slice up your monthly risk budget. 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.
Fact is, all traders will eventually experience a losing day, so you should always have an intraday maximum trading loss level set.
The Hardest Part? Actually Stopping
Here’s where the rubber meets the road.
When you hit that number….STOP TRADING for the day. Full stop. Game over.
Instead of frantically trying to “make it back” with increasingly desperate trades, do what the pros do: walk away. Hit the gym. DM your crush. Watch cute animal videos. Anything but stare at those charts.
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:
“Our greatest glory is not in never falling, but in rising every time we fail.”
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 ensured that the losses incurred are small enough to easily overcome tomorrow.
Your first priority should always be capital preservation! Losses happen, but make sure your account survives to trade another day.
Better to have a piggy bank for trading that’s been “wounded” but still intact.
Remember: Today’s small loss is tomorrow’s opportunity.
