Greetings traders and welcome back to another In Depth with
Chris episode. In today's discussion,
we will be covering the daily loss limit.
This is one of the rules that we do have as part of our Gauntlet
and Gauntlet Mini programs.
It's a limitation on how much you can lose. In simple,
it's something that applies to the Gauntlet Mini, which if
you haven't checked it out,
I strongly recommend you do, but it's something that also
applies to life as a trader. Understanding a daily loss
limit and imposing one in your own trading account can help
you navigate through some treacherous waters during those down days.
But without further ado, let's go ahead and dive on into
those disclaimers and work on into that juicy material that follows.
People are emotional beings by nature, and emotions
will usually adversely affect and influence a trader's decision-making skills.
That is just a simple fact and the reason why it
is crucial to have rigid principles and emotionless trading
strategies when we are trading. One of the most important
rules when trading is implementing a Daily Loss Limit rule.
Especially if we are aggressive-style traders. It is absolutely
vital for every trader to have some sort of loss limiting system
or rule. Whether this Daily Loss Limit rule is based on a
fixed percentage of total assets or a fixed percentage loss
from capital employed in a single trading day,
it doesn't matter. Many trading platforms also have a mandatory
daily lost system where a trader's net loss cannot hit or
exceed a predetermined daily loss limit at any point during the trading day.
If at any point the loss exceeds the limit amount, the trading
platform can potentially flatten any open trading positions,
canceling pending orders, or go ahead and suspend an account
from placing any new trades until the start of the next trading
day. In most cases, exceeding the Daily Loss Limit will also
make an account automatically ineligible for a funded program
if the trader happens to be in one, just like the Gauntlet Mini.
By the way, if you have not liked and subscribed,
please do me a favor and do that because it allows me to
keep coming out with these videos for you guys.
By definition, a Daily Loss Limit is the maximum amount that
an investor can lose on their total asset amount or a specific
trade per day. Many investors self-implement a daily loss
rule while trading platforms or funded programs themselves
usually make this a mandatory loss limit rule as part of the trading process.
This Daily Loss Limit rule is based on a fixed percentage
of total assets or it's usually a fixed percentage loss from
capital used in a single trade. A good way to think of what
a Daily Loss Limit is, is to compare it to a circuit breaker.
After a certain percentage or flat amount has been lost from
a trade, the Daily Loss Limit can automatically stop the trader
from trading any longer or immediately exit the losing position.
With this daily loss in place, exiting a losing position should
be automated and calculated rather than something brought on by a panic attack.
In practice, the daily loss limit is a way of preserving
profits and just capping losses. When the limit is reached
disciplined traders simply stopped trading, without telling
themselves that the market will turn around at any minute
and risk catching a falling knife. Refusing to follow your
own Daily Loss Limit rule is behavior more akin to a gambler
than a trader. Every trader is different, and there is no
one right answer for a daily loss limit.
It truly depends on your risk tolerance, aggressiveness, and
frankly, emotional stability. Usually one of the best rules
of thumb is to set a 2% daily loss limit for yourself.
However, again, it depends on you. Many traders think that
2% loss limit is just too small. For these type of traders,
it's that a limit usually feels that they stump their ability
to trade in a more aggressive manner, and as such, these kind
of traders usually want a larger Daily Loss Limit. But on
the other hand, many professionals and larger scale investors
believe that a 2% loss limit is already too risky.
In fact, many of these traders have a .5 to .25% daily loss limit on their portfolios.
A 2% loss in one of their accounts is considerably
larger than a 2% loss for a trader that is trading with
standard retail capital. Before even initiating a trade, a
Daily Loss Limit system can be put to work.
It's really quite simple. When we decide how much of an asset
we're interested in purchasing,
we're also simultaneously calculating how much loss we will
be willing to incur on that asset without breaking our daily loss rule.
If we were to say that we follow the 2% rule,
for example, when establishing our position, we would also
place a stop order within a maximum of a 2% loss.
Let's talk about how to avoid breaking the Daily Loss Limit.
A stop-loss order first and foremost is a great tactic to
make sure that we do not break our Daily Loss Limit.
This is a type of order that minimizes losses by deciding
on a specific price that won't allow our value to decrease
beyond. If the price of our trade reaches the stop loss number,
then the position is exited.
If we do not physically create a stop-loss order, we can also
come up with a mental stop-loss order
and implement it. But if you are going to keep it on the mental
side of things, make sure you're going to stick to your principles.
There are other things you can do as well to improve yourself
as a trader and limit your losses.
One of these things is to limit your amount per trade.
If you are lowering the amount of money you use per trade,
you may cap your gains,
however, you will also limit your losses, which is arguably
more important. If you're always struggling and constantly
hitting your loss limits,
this will automatically mitigate your risks and
it puts less money on the line.
We could also consider practicing our trading skills on a
simulator before ever trading real money.
This is a very, very overlooked process. By trading on a simulator,
you can learn what works, what doesn't work, and correct reckless
behavioral patterns while trading, without spending or risking real capital.
We want to make sure that we analyze everything we do and
we want to be our harshest critic.
We want to make sure that we research the timing, the volatility,
also get good at are fundamental and technical analysis. Building
a trading journal can also go a long way in limiting our
daily losses and helping us avoid hitting a Daily Loss Limit. Through journaling,
we can learn more about ourselves, our training behaviors,
and this will allow us to review our trades and better understand
what is hurting our performance.
The Daily Loss Limit rule is important for three major reasons.
The first reason is that it creates emotional and psychological
clarity when we're trading. Trading can be very mentally taxing,
and if we already know what we're allowing ourself to lose
ahead of time per day, it makes trading considerably easier
no matter the circumstances, which then in turn can lead to
better trading results and actually lead to more profit.
The second reason a Daily Loss Limit is an excellent rule
is it allows ourselves a way to critique ourselves and improve
as a trader. Everybody's going to have a down day.
It is a fact of life and a fact of trading.
However, if we were constantly hitting our Daily Loss Limit,
it could be a sign that we need to improve and learn to read
the markets better. It's okay to have an eye-opening experience,
even if it's uncomfortable one, if it allows us and we use
it as a platform to excel ourselves farther forward. Hitting
our Daily Loss Limit frequently is a signal that we may be
doing something wrong, and if we listen to that, then we can
stop doing what we're doing wrong. The third and final
reason why a Daily Loss Limit is an excellent choice to implement
is that we can just simply cap our down days while being
profitable on most days outside of that.
You can quickly move ourselves towards a path of consistent
profitability, if we're making sure that we're not letting
our losses get to drastic on any one day.
To wrap it all up, the Daily Loss Limit rule is so much
more than just something that you might encounter
while trying to pass the Gauntlet Mini. The Daily Loss Limit
rule is something that when used, can instill discipline because
you have to follow it, it helps encourage healthy trading
habits, as well as providing a means to even out your negative
days, which does affect you both monetarily as well as psychologically.
If you can control yourself and keep yourself more even keel
as a trader, the numbers show that less emotional traders
do on average trade better.
That doesn't mean that you can't have emotions from time to time.
I'm not telling everybody to be a serial killer, but guys,
think about incorporating a Daily Loss Limit. Until next time,
thank you for joining me, as always. I will see you soon.
Happy trading. Good luck in the markets. Over and out.