In practice
A daily limit stops one bad day from becoming a disaster. Traders set it in advance, often at two or three times their normal risk per trade, and stop for the day when it is reached.
Its real job is protection from yourself. After several losses judgement gets worse, and the limit ends the session before emotional trades start.
What to watch for
The limit only works if it cannot be argued with in the moment. Prop firms enforce theirs automatically and close the account when it is broken, so know exactly how their figure is calculated.
Related terms
3 terms- Revenge tradingTrading to win back a loss right away, usually bigger and sloppier; small losses become big ones.
- Risk of ruinThe chance a strategy loses so much you can't or won't continue; driven mostly by risk per trade.
- Prop firmA company that lets you trade its capital after paying for and passing an evaluation with strict loss limits.