So yeah, I decided to create this thread after my experience in dealing with losses. First of all a daily loss limit is a fixed amount of money that you are prepared to lose when trading for a day.
I always maintain a $10 daily loss limit because i trade 0.1 lot size on eurusd so basically this means a 10 pip daily loss limit. Depending on the lot size you trade you should find a daily loss limit you can tolerate, and stick to it. Inability to stick to a daily loss limit means you lack one of the traits of being a successful trader which is discipline.
When ever i reach my daily loss limit, i shut down my laptop and leave the house so i am not tempted to trade again. Now, for me daily loss limit has nothing to do with the number of trades i take in a day. I can take 20 trades it doesn't matter, but what matters is that my total loss on those 20 trades, does not exceed my daily loss limit.
The advantage of setting a daily loss limit is that, it keeps you afloat to be able to trade another day, as you will always have some money remaining in your trading account.
Daily loss limit also helps you deal with the temptation of averaging losses or trying to overtrade to recover losses you made. Psychologically, the human brain is wired to try and recover losses but this can end badly. When you enter a trade and make a loss, re-entering can be dangerous because the market dynamics that caused the loss have not yet changed.
Before you know it, you could find yourself spiraling out of control & chasing the market in a cat and mouse fashion and you will only end up sustaining more losses. If you had walked away when your daily loss limit was reached, you would have saved yourself the heartache and financial losses that followed. Remember that "the market can stay irrational, longer than you can stay liquid".
Just thinking out loud here guys, let me know what you think.
