Why You Need a Daily Stop-Loss

Trader calculating a daily stop loss

Don't let a single bad day ruin your entire month. When you're 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 to quit—they set and abide by a daily stop-loss. There's always another day, and it's best to preserve capital when things aren't going well. That way, you have money to trade when things are going well. 

Key Takeaways

  • A daily stop loss is an amount you are willing to lose in one day before you stop trading for that day.
  • A daily stop loss is not an automatic setting like a stop loss you set on a trade; you have to make yourself stop at the amount you set.
  • A good daily stop loss is 3% of your capital, or whatever the average of your profitable days is.

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 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 every day, and write it down before you begin trading. Depending on the method chosen for determining your daily stop-loss, it may fluctuate.

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 loss percentage. Using both methods is ideal because it helps you establish a baseline and the habit of setting a daily stop loss.

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 tends to lead to revenge trading).

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

If you have a day trading track record, use the dollar amount of your average profitable day to find your daily stop loss. 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. For example, 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 you can easily recoup any losses with a positive day.

You can also add a buffer to this loss level. You could set this at any number, such as 25% or 50%. The buffer adds additional loss-recuperation time. For instance, if your average profitable day is $500, your daily stop-loss with a 50% buffer (half of your profitable trading day) would be $750.

A 25% buffer would be one-quarter of your profitable trading day, and so on. You can set the buffer for however long you want your recoup time to be,

So, if you hit your daily stop-loss (lose $750 or more), it will take about a day and a 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 forcing you to quit trading.

If you're reaching your daily stop loss more than a few times a month, you should stop trading and see how you can adjust your strategy.

However, a word of caution is in order—you must establish this in advance. If you set your stop loss at $500, keep it until the next day. If you get in the habit of adjusting your daily stop loss on the fly, you're likely to end up losing too much. 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, your method may need refining. You might need to reduce the risk on each trade, adjust your strategy for current market conditions, or find another market to trade in.

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 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, you can 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 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 of trading. Even worse, it could significantly deplete your trading account.

You can apply these daily stop-loss guidelines to forex day trading, stock day trading, or day trading other markets.