Derived from your risk, not picked arbitrarily
A sensible daily limit equals a small multiple of your per-trade risk, commonly three consecutive losses. The reasoning is that a run of three is statistically ordinary, while continuing to trade after it on the same day is usually an attempt to recover rather than execution of signals.
Its value shows in the link to revenge trading: the known signature of that behaviour is entering faster at larger size after a loss, and a daily limit cuts the sequence before it begins. The value is chosen at a calm time and applied at an uncalm one — which is exactly the point.
Written risk versus exposed risk
This family uses the same reference account: $1,000 risking 1%, or $10 a trade. The shared idea is that real risk is not what you wrote on a single trade but what is actually exposed when the market moves.
Two correlated positions at 1% each are not 2% spread across two trades; they may be a single 2% risk. Measuring that difference is what these pages do.
The formula
Daily loss limit = per-trade risk × acceptable consecutive losses per day
A worked example
On the reference account: $10 per trade, with a limit at three losses = $30, or 3% of the account.
Compare the alternative path: a trader with no limit loses three trades then doubles size to recover. Doubling in sequence — 10, then 20, 40, 80 — reaches $150, or 15% of the account in one day. The system did not change, nor the streak; the daily limit alone separates 3% from 15%.
Common mistakes with this term
- Choosing a psychologically comfortable number instead of deriving it from per-trade risk.
- Breaking the limit "just once", which voids its entire function — its power lies in being non-negotiable.