Use a Daily Stop-Loss to Protect Your Trading Income

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

Use a Daily Stop-Loss to Protect Your Trading Income

Most day traders know about limiting the risk of their trades, but capping daily losses is a practice traders could also benefit from. By capping risk on each trade and day, the trader is taking steps to make sure that no single trade or single day ruins their month, or worse yet, their account. To become a successful trader, try to think like a trader who already is successful–and who therefore relies on his trading account (capital) to make an income every month in order to live. When a trader loses a large chunk of capital it should feel similar to how most people would feel if they got fired from their job. Limiting risk, on each trade and on a daily basis, can help avoid this uncomfortable situation and feeling.

Strings of losses occur. Even following a great system, and having a keen market insight will result in a number of losers in a row at some point. That’s just the way it is. If you risk too much on each trade though, a small string losses can wipe out an account.

Only risk 1% to 2% of your capital on a single trade. This way no single trade will ruin you. See Determining Binary Options Position Size for a detailed description on how to manage trade risk in this way.

While capping the risk on your trades is important, so is capping the amount you can lose in a day.

Let’s assume you trade for a month (20 trading days), making a profit of $2000. On average you made about $100/day; some days you lost, some days you made less than $100 and other days more, but that is the average. You have a weekend off, feeling good about last month, and then proceed to lose $500 on the next trading day.

Change these numbers to suit your personal circumstance, but the point you should take home is that this daily loss is out of whack with the average daily profit.

It will take five normal days just to make back that single daily loss. This shouldn’t happen.

I recommend a floating daily stop, or a consecutive-loss-daily-stop (quite a mouthful).

A consecutive loss daily stop is when you define how many trades you are willing to lose in a row before calling it a day. If I lose three to four trades in a row, I am not in the right headspace, my strategies aren’t suited to the market or something else is doing on. In any event, I stop trading. I don’t want to waste more money than I have to on a day that isn’t showing me the type of price action I want.

A floating daily stop is a bit more complex. It is based on your average daily profit over the course of the most recent 20 to 30 trading days. If you made $2000 over 20 trading days, your average daily profit is $100. Therefore, keep your maximum daily loss near this figure–between $100 and $125.

This is a simple approach to get you started. To get more precise, take an average of only your winning days. By not including the losing days in the average, you may be making $175 on your profitable days. This is also an acceptable daily stop level.

The idea is to make sure your losing days don’t greatly exceed how much you make on profitable days.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

By capping your daily loss at roughly the same amount as your average profitable day, you make sure that no single day significantly hurts you. If you follow this rule, any money you lose one day can easily be recouped on an average winning day.

Managing trade risk is important, but so is managing your daily loss. Instill a daily stop loss on yourself, so that one (or several) losing day doesn’t jeopardize your trading. If you lose three or four trades in a row, stop trading for the day. Also, specify the maximum amount of money you can lose in a day–based on your daily average profit–and then stick to it. Just like you don’t want one trade to ruin you, you don’t want one day to ruin you either.

Day Traders – How and Why to Use a Daily Stop Loss

Learn how to control daily risk while day trading, so that a single losing day is easily recouped by a winning day and won’t ruin your whole week or month.

In addition to controlling risk on individual trades, nearly every professional day trader I know, including myself, also uses a daily stop loss. Just as a day trader shouldn’t let one single trade ruin their day (although this does occasionally happen), professionals also don’t want one single day to ruin their week or month.

Trading for a living is a tough business, and taking a huge single-day loss takes a toll psychologically as well as financially. Day traders rely on their trading capital to live, so taking a huge one-day hit may put that income in jeopardy, or at least make the trader feel that way. Aside from the financial hit, a big loss may shake our confidence, messing with our ability to perform.

Manage your risk on each trade, but even more importantly manage your risk each day so one day’s loss doesn’t kill your income or your confidence. Here’s how to do it.

Managing Trade Risk

Manage trade risk and position size! As a general rule, I encourage all traders to never risk more than 1% on a single trade. If you have a $10,000 account, that means you set a stop loss on your positions so you don’t lose more than $100 on a single trade.

The idea behind this guideline is that with several (or many) trades placed each day, even a string of losing trades won’t significantly draw down your account capital. On the other hand, if risking 10% per trade, as many novices do, then the account can be cut in half (or worse) by several losing trades in a row.

This method of risk control may vary slightly depending on the winning percentage of your strategies though. If you have a very high win rate, you may be willing to risk slightly more on each trade, since a higher win rate is less likely to produce a long string of losses (without some offsetting gains).

Therefore, managing risk on individual trades is very important, but it is equally important for day traders to set a daily stop loss.

Why Use a Daily Stop Loss

When trading any market I ascribe to the 1% rule listed above (usually I risk much less, simply because even risking 1% with a larger account can create positions that are too large for day trading); I don’t risk more than 1% of my account on a single trade. With leverage and the number of trades I can make each day there is no reason to risk more than that since even with keeping risk low, great returns are possible. If you are just starting out with real capital, risk only 0.5% on each trade until you prove your skill in the live market.

The main function of the daily stop loss is to prevent a single day from hurting the overall monthly income. Say your average winning day is $200/day, but when you have a losing day you lose $600 or $700. Under these conditions, even if you win about 80% of trading days (16 out of 20 days a month) you are just barely breaking even.

If you applied a daily stop loss on yourself you could greatly reduce the amount you lose on losing days, which in turn creates a consistent monthly day trading income in the scenario above.

Use a Finviz Elite subscription to see what is moving aggressively in the pre-market and during the day, look for stocks that are gapping pre-market, and run technical filters for stocks breaking out of ranges or other chart patterns.

Incorporating a Daily Stop Loss

Since I risk less than 1% per trade, if I lose 3% in a single day that means I have lost 3 trades in a row, or my losses are greatly outnumbering my winners. In either case, if I lose 3% of my account I am done for the day–that is my personal day trading daily stop loss. If risking 0.5% per trade, set a daily stop loss limit at 2% or 3% as well. This gives more leeway, in that 4 to 6 losing trades can occur in a row before being stopped out.

Since I know how my strategies perform, it is very rare that I lose 3 trades in a row without a winner in there. And winning trades are bigger than losing trades. If 3 losers occur in a row I may not be in the right mind frame or my strategy may not work under those particular conditions. In either case, the consecutive losses let me know I shouldn’t be trading. Losing trades and losing days happen, and that is fine. A daily stop loss contains the damage.

Another type of daily stop loss is based off of the average winning day. If you add up just the winning days each month and then take an average [divide the total sum of profit (in dollars) on winning days by the number of winning days in that month], your daily stop loss should be pretty close to that number. Say your average winning day is $2500, then you shouldn’t be willing to lose much more than $2500 on a losing day. Using this method means your daily stop loss will change with your performance over time.

With this method, a losing day doesn’t wipe out more than one average winning day, and it only takes one average winning day to recover the loss. Stop trading when you have lost more in a single day than you usually make on a winning one.

While occasionally you may be able to recover the loss if you keep trading, more often than not you are not in the right mind frame and will end up losing even more.

Hitting your daily stop loss should be rare, only occurring up to about three times a month, and ideally once a month or less. If you continually lose three trades in a row each day, your strategies or implementation need more work. If you do have winning trades during the day, but you are still hitting your daily stop, then your trades may have some risk/reward issues.

Don’t let one trade ruin your day, and don’t let one day ruin your month.

Using a Daily Stop Loss for Trading – Final Word

These are ideas on how to implement a daily stop loss and how to manage risk. Plot your own method for controlling trade-risk and daily-risk based on your own personal style, strategies, and capital.

In my opinion, the daily stop loss is a huge factor in determining how long a trader stays in the game. If you want to make an income from day trading you need to make more from your winning days than you lose on your losing days. One way to do that is with a daily stop loss.

You may choose a daily loss limit based on the amount of your average winning day. Using such an approach means your daily stop loss may change over time depending on performance. You may also choose to stop trading if you lose 3 (or some other number) trades in a row, or if you lose a certain percentage of your account.

If you are consistently hitting your daily stop loss, it indicates your strategies or implementation need work (see 5 Step Plan for Forex Trading Success). If you aren’t profitable, and therefore can’t create a daily stop loss using the “average profitable day” method, then don’t lose more than 3% of your capital per day.

If these approaches don’t curb the drop in your account value, stop trading with real money, go back to the simulator (demo account), and hone your skill further.

For a downloadable guide on forex trading with loads of forex strategies, see my eBook: The Forex Strategies Guide for Day and Swing Traders 2.0

Why You Need a Daily Stop Loss

Don’t a let a single bad day ruin your entire month. In day trading you’re going to have bad days where everything seems to go wrong. Successful traders know how to handle such days, and know when it’s time to quit–they implement a daily stop loss on themselves. There’s always another day, and it’s best to preserve capital when things aren’t going well, so you have it for when they are.

A Day Trading Daily Stop Loss?

The day trading daily stop loss is the amount of money you allow yourself to lose in a day before you call it quits (for that day). This is different than a stop loss order, which controls the risk of an individual trade.

The daily stop loss forces you to realize that today likely just isn’t your day, and preserving your capital for another day is the best option.

Once losses start to mount it can become very tough to stay focused, and not get into “revenge trading” mode, which typically results in even bigger losses. Revenge trading, or a “risk spike” is when you abandon your trading rules in favor of trying to gamble your way to a quick profit–a very bad decision.

Setting a Daily Stop Loss

Set your daily stop loss and write down what it is before each trading day begins. Depending on the method chosen for determining your daily stop loss it may fluctuate daily.

If you are new to trading and don’t have a track record, your daily stop will need to be based on losing trades in a row, or a percentage loss. Using both of these methods is ideal.

If you lose 3% of your account in one day, stop trading. Also, if you lose three trades in the row (you may alter this number to suit your trading style) consider stopping for the day, or at least taking a 10+ minute break if you’re frustrated (trading when frustrated has a tendency to lead to revenge trading).

The 3% rule is your maximum loss for the day; reduce this amount if you wish, but try to never lose more than 3% in a day.

If you have a day trading track record, to find your daily stop loss use the dollar amount of your average profitable day. For example, add up your profits on all days you were profitable in the last month, and then divide by the number of profitable days. If your average profitable day is $500, then use this as the daily stop loss. This is a good method because it makes sure that any losing day can be easily recouped by a positive day.

You can also add a buffer to this level, say 50%. Therefore, if your average profitable day is $500, your daily stop loss would be $750. That means if you hit your daily stop loss (lose $750 or more) it will take about a day and half of profitable trading to recoup the losses. If you are a relatively consistent trader, this added buffer gives you more room to make back some money during the day, without being forced to quit trading. This must be established in advance though, don’t say your daily stop is $500, and then when you lose $500 adjust it to $750. When you hit your established limit, stop trading.

No matter which daily stop method you choose, reaching your daily stop level shouldn’t be a common occurrence. Reaching it once or twice or month is manageable, but if you are reaching it more often than that then your method may need refining, risk needs to reduced on each trade, or current market conditions are not favorable for your strategy.

Day Trading Daily Stops – Final Word

If you are new to trading, choose a percentage of 3% or less of your account value. Write this percentage down in your trading plan, then each day determine what your stop loss (in dollars) is for that day. If your closed and/or open position losses exceed this dollar amount, close all day trades, cancel all day trading orders and stop trading for the day.

If you’re an experienced trader with a track record, then use the dollar amount of your average profitable day over a 30 day rolling period as your daily stop loss. Write this dollar amount down each day; if closed and/or open position losses exceed this amount then close all day trades, cancel day trading orders and stop trading for the day.

The daily stop loss serves to protect you from taking a massive loss on a single day, which could potentially ruin an entire month worth of trading, or worse yet, significantly depletes your trading account.

These daily stop loss guidelines apply whether you’re forex day trading, stock day trading, or day trading other markets.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

Binary Options Trading School
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: