For Business

Risk & Money Management

How to Set a Maximum Daily Loss

A maximum daily loss is a number set before the day, past which no more is risked that day, so that the worst a day can be is fixed before it begins. This paper shows you a 3% limit on a 10,000-dollar example account and one example day run against it, 280 down after four trades with 20 left; the idea as a floodgate whose mark was painted before the rain; the day's count drawn as a line against the limit; the limit counted in matches, three at one per cent each; and the History tab set to Today on your platform, whose Profit total is the water line, with a note on brokers and prop firms that apply a limit of their own on equity.

Difficulty
Intermediate
Reading time
5 min
Pages
8
Reviewed by
Saman Rahbar

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One day against the limit

A maximum daily loss is a number set before the day, past which no more is risked that day. Take three per cent of a 10,000-dollar example account, 300 dollars, and one day in example figures: a trade at 10:40 loses 100, one at 12:05 loses 100, one at 14:30 makes 40, one at 16:20 loses 120. The day stands at 280 down, with 20 left under the limit. A trade sized to risk 100 no longer fits, so the next trade is sized to 20 or is not placed. The limit does not make the day better and it does not know what the last hour holds. It fixes the worst the day can be before the day begins, and it is set then, not at 16:20.

A floodgate with a mark on the wall

Picture a floodgate with a mark painted on the wall. The water rises with the rain, and when it reaches the mark the gate comes down and stays down until tomorrow. A maximum daily loss is that gate. The water is the day's losses, rising a trade at a time; the mark is the limit, painted before the rain; and the gate coming down is the rule that no more is risked once the mark is reached. The gate does not stop the rain, and it does not know whether the afternoon would have been dry. It only stops the water going higher than the mark today, which is the whole of what it is for.

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