Maximum Daily Loss: Be Aware of This Rule!

The daily loss or daily stop-loss rule protects the trader's capital from rapid losses, but also from over-trading and fighting the market. When a trader reaches a certain loss amount, he or she will be forced to stop trading on that day.

The rule can be easily put in place by setting the stop-loss order, which stops the positions when a given limit is reached. Optimally, the trader should also set a small reserve amount before reaching this Maximum Daily Loss in case that the order is filled incorrectly. Therefore, in case of Challenge 20, if the Maximum Daily Loss limit is USD 1,000, it is better to set the limit at USD 950. Of course, this also depends on the size of traded positions.

Although compliance with this rule does not depend on market trends and can be easily maintained, as opposed to, for example, the desired profit, it is the most frequently broken rule. We also often encounter wrong interpretations or misunderstanding of this rule. The purpose of this article is to shed light on daily loss.

The Maximum Daily Loss of the trader must be set to a maximum of 5% (10% in the case of Aggressive Challenge) per day. The rule means that at any moment of the day, based on CEST, the loss from the closed positions on that day together with the current open loss must not exceed the required daily stop-loss rate as illustrated by the following formula:

Daily Loss Limit = sum of position results closed that day + current open profit/loss

In case of Challenge 10, the daily loss limit is USD 500. So if in one day you lose in closed positions for example USD 400, your account balance may no longer decrease by more than USD 100 that day. However, neither can it be USD -100 in open positions. Conversely, if you earn USD 400 in one day, then you are allowed to let your account amount drop by USD 900 on the same day. Let us remind you once again that open positions are also included in the Maximum Daily Loss limit calculation. Therefore, for example if you have incurred a loss of USD 400 on closed positions in one day, and then open a transaction, which records a loss of USD 200, but eventually ends up profitable, then it is unfortunately too late. The reason for this is that at one point, your daily loss amounted to USD 600, which exceeds the value of the Maximum Daily Loss.

Watch out for the daily loss renewal at midnight! If you earn for instance USD 500 and then you record an open loss of USD 700 on the very same day, everything is fine. However, once the clock strikes midnight, you no longer have the benefit of USD 500 from the previous day, and the loss of USD 700 means the violation of the daily loss limit.

The Maximum Daily Loss provides the trader sufficient space for trading and guarantees the investor a clearly defined daily risk. This rule provides a guarantee to both the trader and the investor that the account is not going to drop below this threshold in a single day.