I read this article from investopedia recommending a 6% monthly loss limit for trades on that month. It said that once the 6% limit is reached, traders will stop trading for that whole month. But after reading the article I am still not clear with this rule. Does the rule simply imply that if your losses for that month hit the 6% threshold, cease trading immediately?
However this would mean that I can only have 3 losing trades if I’m using the 2% loss limit per trade and will be missing out lots of opportunities streaming from the market.
Or is it the rule imply that 6% loss out of the month’s beginning balance?
I have read that article. My thought on it are this. it would be from the months beginning balance. I think if you are considering this rule from the standpoint of a retail trader that risks 2% on each trade and lets a loser actually lose 2% then its going to put a big limit on your trading. I get the feeling a pro would rarely lose or risk 2% on a single trade.
I think the point is if you look at a graph of your equity it should be relatively smooth. I think 2% is a high amount of risk for each trade for me. Its a personal decision and your trading plan should clearly define risk and I think have some sort of quit point be it 6% or 30% just decide what it is and what you will do before you get to that point.
I am curious, what is your capital risk per trade? And what do you think pros risk? And by quit point do you mean for live testing a real money system?
For example, you’re trading a new system, lose a certain % and then declare that system a bust and move on to the next one? Is that what you are talking about?
However this would mean that I can only have 3 losing trades if I’m using the 2% loss limit per trade and [B]will be [U]missing out[/U] lots of opportunities [/B]streaming from the market.
New people [amateurs] to trading think this way.
Unless they have been trained right from the beginning to look at trading from a professional point of view.
[B]New people [amateurs] think about how much they can win.
Professionals think about how much they can lose / is at risk.[/B]
Because professionals have understood what they can control and new people [amateurs] have not, yet.
It is a different set of mind.
It is like comparing day with night.
If you have a good trade set up then why wouldn’t you trade it? Regardless of what happened in the past? A month is an arbitrary invention.
If you don’t trade, you don’t loose.
If you don’t trade, you don’t win.
I think the 6% rule is a psycological tool, to help keep you from ‘going on tilt’.
Pro traders work on 2X and 4X leverage, very occasionally 8X and risk a tiny percentage of account balance. But they are trading very much bigger accounts. A pro trader will almost certainly have their own retail account and I would be extremely suprised to learn of any who exceed 1% of account… more like 0.25% or less.
yeah ok, it’s just that I see forex as a probability game. If your primary trade setups have a probability edge then you should trade them regardless of what time of month it is or whether one lost yesterday. Otherwise you’re just PMS’n
A casino owner wouldn’t shut the place down for 2 weeks just because some lucky bloke hit them big on the roulette wheel on the 15th of the month because the probability is in thier favor in the long run.
if you have a string of losses during the first 2 weeks of a month, then what’s the reasoning for stopping trading for the next two weeks. After two weeks of not trading, your account balance hasn’t changed. The past losses haven’t changed. You trade strategy hasn’t changed, (unless you decide it was a bad strat to begin with) What has changed besides the passage of time? Nothing. So why do it unless it’s just to cool off and let your mind and psycology clear up and rest a bit?
If I understand the essence of your question. The best answer I can give is. I follow my plan. We are assuming in this that I have what I think is a winning trade strategy. If I believe that then I follow it regardless of past losses. Losses are to be expected because there is no such thing as a 100% win rate holy grail. to use an overused term.
How many losses do you have to have before you think to yourself my trading strategy is a piece o cr@p and it’s time to do something different? But I don’t think that’s the question you’re asking me is it?
The original 6% question implies waiting a certain length of time after losing a certain amount and I still don’t see the point in waiting for a certain length of time to pass before trading again.
if youre talking about the emotional impact of big losses then yes, I can see the value of a cooling off period. But that’s for you humans.
For us unemotional Vulcan’s it doesn’t apply… (just kidding)
The fact that I’m answering your question should tell you that I don’t think it’s hot air. I was simply contrasting what I do in my thread with much of what I see on others.
I thought I was pretty clear in my answer to the 6% drawdown question. I’ve endured drawdowns much larger than that. I keep my account size private, but I’m very comfortable with the figures you mention.
As you said, no set up produces 100% winners regardless of confidence by the trader excecuting it.
Every trader has to deal with losses and losing streaks. The bigger the account the trader trades the bigger the psychological impact in confidence and so on, on the trader when losses are occuring. Same applies to wins.
This 6% rule putting forward in this thread is a suggestion how to deal with that impact of losses.
I know of traders who stop trading after two losses in a session and wait for the next session. Or they stop trading for the rest of the week if they have 5 losers in a row and so on.
On the other side I know of traders who stop trading for the rest of the year when the reach their pre-determined yearly average target in November of that year already.
To add some clarity to my answer, if I stopped trading after every 6% drawdown, I would go broke rather quickly. Losses sometimes come in strings, and so do wins. If I stop after a string of losses, I won’t take advantage of the wins that are sure to come. The premise of my money-management is to keep me “in” when those big wins happen.
I pay particular attention to drawdowns when I design a system, and 6% is well within my limits. Did I mention my position size is typically 5%?
A pro trader will almost certainly have their own retail account and I would be extremely suprised to learn of any who exceed 1% of account… more like 0.25% or less. 