At least once in your trading career, you have probably felt the urge to take more trades even though you have already incurred more than your usual daily losses.
In such cases, you often think to yourself that with more trades, you will be able to recoup 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 is crucial if you do not want to lose your shirt, and it is especially important for day traders who make many trades per day because there is a higher chance of losing streak.
There will be times when you get so caught up in market movements that you lose sight of your primary objective: to protect your capital.
This is exactly why you need to set a daily loss limit. It tells you you’ve had enough and it’s time to fill it up and call it a day.
It doesn’t necessarily mean that you are a lousy trader; There are days when your game is down, or your trading system may not have been designed for the market environment that day.
Even great athletes like Roger Federer, Stephen Curry and Lionel Messi have had their share of bad days.
Just like professional athletes who underperform at times, traders also experience those days when they feel out of sync with the markets.
It is not difficult to determine the maximum trading loss per day. You just have to keep in mind that it has to depend on your trading personality and risk tolerance.
Here are some personal suggestions:
Limit your losses to a fraction of your profit target for each day.
For example, if you aim to make 1.5% profit each day, you can set your maximum trading loss to half of that, or 0.75%.
Set your maximum trading loss to half of your average winnings.
If you have experience and keep a well detailed record of your trading history, you can calculate your average profit per day and set your maximum trading loss to half of your average profit.
Suppose your average profit per day from all your winning days equals 0.5%, then you can set your maximum daily trading loss to 0.25%.
You can also set it to a small portion of a long-term number, such as a maximum loss of 10% per month.
With an average of 20 trading days a month, 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 truth is that all traders will eventually experience a losing day, so you should always have a maximum intraday trading loss level.
And once you get that far – and that’s the hard part –Stop trading for today!
Instead of pursuing more unwilling business ideas to recoup those losses, just swallow your pride and admit that it’s just one of those days when you have to walk away.
Ralph Waldo Emerson once said: “Our greatest glory is not in never falling, but in getting up every time we fail.“
Learn to accept defeat now and then because we need to remember that trading is a protracted war, not a single battle.
By protecting yourself and your account today, you have ensured that the losses incurred are small enough to be easily overcome tomorrow.
