Don't 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 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 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, 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.
The Balance does not provide investment advice. Day trading is considered speculative with high risks of loss of principal. This should not be considered a strategy for retirement, savings, etc. Please speak with a financial planner regarding investment strategies for those life events.