Why decide it in advance, and in money?
After a loss, it is harder to make your usual decisions. You may want to win the money back quickly, enter setups you had not planned, or trade bigger (see How to stop revenge trading). That is why you set the limit before you lose.
Also, if you only remember “3%,” you have to do the math while you are losing. If it is already an amount, you only need to look at it.
Three ways to decide it
There is no single right answer. Think from these three starting points and choose an amount that fits you.
1. From your risk per trade
Daily limit = risk per trade × the number of losses you allow in a day. For example, if you risk 100 (in your account currency) per trade and stop after 3 losses, your limit is 300.
2. From a percentage of your balance
Daily limit = balance × the percentage you choose. Enter your balance and percentages in the daily loss limit calculator to see daily, weekly and monthly amounts, and how many losses it takes to reach your daily limit.
3. From your everyday life
An amount you could lose in one day without it affecting your housing, food, family or sleep. Apart from the math, think about a limit from your own life, too.
Some traders compare the three amounts and use the smallest one as their daily limit. Whichever way you choose, the amount is your own decision.
- Balance 10,000 (in your account currency), risk per trade 1% → 100
- Daily limit 3% → 300 (with losses of 100 each, you reach it after 3 losses)
- Weekly limit 6% → 600, monthly limit 10% → 1,000
With a balance of 200, 1% is 2 and 3% is 6. The calculation works the same way at any balance size. But with a small balance, even the smallest lot size your broker allows may risk more than you planned per trade, depending on your stop loss distance (the smallest lot size depends on the broker and account). These numbers only show how the calculation works. Set yours based on your own strategy, balance and life.
Check it with numbers
How many losses to reach it?
If 3 losses reach your limit, a losing streak alone may reach it more often than you expect. With a 50% win rate, and assuming each trade is independent, the chance of at least one streak of 3 or more losses is about 51% in 10 trades and about 79% in 20 trades (a calculation example). Check your own win rate and number of trades with the losing streak calculator. Reaching your limit on some days also means the limit is doing its job.
Weekly and monthly limits too
If you hit your daily limit several days in a row, your account can fall a lot. Weekly and monthly limits put a brake on that. After a drawdown, you need a larger gain than the loss to get back (−10% needs +11.1%, −20% needs +25%). Check it with the drawdown recovery calculator.
Details to decide in advance
- When your day ends: what time “today” ends for you. If you trade past midnight, a midnight cutoff splits your limit across two days. In the daily trading tracker, you can choose when your day starts. If you use a weekly limit, also decide which day your week starts.
- What counts as a loss: only closed losses, or open losses too? Do you include spread, commission and swap (if your account has it)?
- What you do when you reach it: check that no positions are left open, close your trading platform, write your notes for the day, and so on. Deciding the order makes “just one more trade” less likely.
One way is to write it as an “if–then” rule: “If my loss today reaches my limit → no new trades.”
To see how much is left before your limit after each trade, enter the limit in the daily trading tracker (it adds up the wins and losses you entered with an amount; trades without an amount are not counted).
Change the limit on a planned day, not on a losing day
If you raise your limit “just for today” on a losing day, the limit stops meaning anything. If you want to change it, do it when you are not trading, for example once a month, while looking at your records. If your balance changes a lot, recalculate the amount then.
What research shows (briefly)
- In experiments published in 1990, people who had just lost money were more likely to choose gambles that offered a chance to break even.[1]
- A study published in 2005 looked at trades made in 1998 by US Treasury bond futures traders at the Chicago Board of Trade. It found that traders who lost money in the morning were more likely to take above-average risk in the afternoon than traders who made money in the morning.[2]
- A meta-analysis of 94 independent tests of “if–then” plans found a medium-to-large effect on reaching goals. The goals were in areas like health and study, not trading.[3]
None of these studies tested daily loss limits themselves, and they do not show that a limit will improve your results. Still, research suggests that decisions tend to change after a loss, and that plans made in advance are easier to follow.
If losses are hard for you, or you find it hard to stop even when you want to, you do not have to deal with it alone. Many countries and regions have support services for money worries or compulsive behavior.
Sources
- Thaler, R. H., & Johnson, E. J. (1990). Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice. Management Science, 36(6), 643–660. https://doi.org/10.1287/mnsc.36.6.643
- Coval, J. D., & Shumway, T. (2005). Do Behavioral Biases Affect Prices? The Journal of Finance, 60(1), 1–34. https://doi.org/10.1111/j.1540-6261.2005.00723.x
- Gollwitzer, P. M., & Sheeran, P. (2006). Implementation Intentions and Goal Achievement: A Meta-analysis of Effects and Processes. Advances in Experimental Social Psychology, 38, 69–119. https://doi.org/10.1016/S0065-2601(06)38002-1