It is essential to have a daily max loss set for your trading account to become a successful day trader. A daily max loss is the maximum amount of money you permit yourself to lose in a given trading day. Once you hit this number, you stop trading for the day.
Having a max loss is especially important when you’re new trader, when you’re more susceptible to revenge trading and overtrading. Here’s how to use it:
“I’m going to make it back just one more trade”
Ever have those days where you lose on every trade but you keep on trading? You kept telling yourself, ”I’m going to make it back.” Next thing you know you have given back a whole month’s worth of gains in 4 hours. Every trader has been there.
You need to know when to call it quits to prevent this snowball effect. This is why you need a max loss. Looking at the past trading data of your losing days will tell you what that number should be. The number should prevent you from losing no more than 1-3% of your account on a given day (% will depend on the size of your account and how aggressive of a trader you are).
Don’t Risk it All on One Trade
It is important to understand how you should use a max loss in addition to having a defined amount. If you typically take 2 or more trades per day, you cannot risk your whole max loss on one trade. Risking it all on your first trade of the day might cost you to miss an A+ opportunity where you could have made back the money you lost from your first trade and then some.
You have to leave yourself multiple bullets throughout the trading day. Every trade has the possibility of not working, so don’t blow your max loss just on one trade.
Communicate With Your Broker
With most brokers you can create a daily max loss on your account. Once you define your max loss, you can tell your broker to lock your account once you are down that much unrealized on a given trading day.
This will prevent you from getting in the destructive “I’m going to make it back just one more trade” mindset. Protective measures like a daily max loss are just as important as the big wins on the path to becoming a successful and consistent trader.
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