What Is A Daily Loss Limit?
First, let’s take a quick at what a Daily Loss Limit is. A Daily Loss Limit (DLL) is the maximum amount of money a trader is willing or allowed to lose in a single trading day. The DLL is widely considered one of the more crucial risk management tools for helping traders control their potential losses and protect their trading capital.
Traders and professional risk managers will typically determine a DLL based on calculated risk tolerance, trading strategy, and overall size of an individual trading account, eg. account value. Therefore, setting a loss limit that is comfortable for the individual trader and aligns with their risk management goals is important.
Obviously, trading account sizes vary, and each trader has their own tolerance for risk, so there are a couple of different ways to factor your custom DLL. For instance, you may set your limit as a percentage of your account value. A common loss limit for a trader with $100,000 in their account would be 1%, or $1,000.
Smaller retail traders might be more comfortable setting a flat dollar amount for their DLLs. For example, if you’re a 1 lot trader in the E-Mini S&P 500 futures and have $10,000 in trading capital, you might only want to risk about $500 per day. This amount should give you enough opportunity to make a few trades without putting too much strain on your account value if things aren’t going your way that day.
Once the daily loss limit is reached, the trader should stop trading for the day to prevent further losses and reassess their strategy and market conditions. This helps avoid emotional decision-making and potentially impulsive actions that can lead to even larger losses.
Why a daily loss limit is important
Now, let’s take a look at a few reasons why setting a Daily Loss Limit is crucial for day traders.
A DLL is crucial in futures trading for effective risk management. There are inherent risks involved in futures trading that an effective DLL can help mitigate, such as excessive losses that could negatively affect overall profitability.
Your DLL should also be an integral part of your trading strategy. Having a daily loss limit encourages traders to assess and optimize the risk-to-reward ratio of their trades more carefully. It prompts traders to consider the potential losses relative to potential gains before entering into a trade. By setting a limit, traders must evaluate the potential risks and rewards more objectively, ensuring that the potential gains justify the potential losses.
Lastly, if your goal is to find long-term success as a futures trader, a well-defined DLL will help you bring consistency to the markets each day. By limiting daily losses, traders can better preserve their capital and stay in the game over the long run.
In short, setting a DLL is vital for risk management, consistent trading, risk-to-reward assessment, and understanding risk tolerance. It’s a key part of a trading plan to help navigate market challenges and protect trading capital.
Why Are We Bringing This Up?
There was a time at Topstep when hitting your Daily Loss Limit was considered a rule violation in both the Trading Combine® and Funded Account®. However, this is no longer the case. Topstep Funded Traders™ and those in the Trading Combine will never again lose their account because they hit or exceed their Daily Loss Limit.
We have now begun labeling this former rule as an “objective,” meaning that if you hit or exceed your pre-defined DLL, your positions will be auto-liquidated and you will be locked out of your account for the remainder of the trading session, but you will not lose your account or have to reset your Trading Combine. You will now be able to enter trades again the following day with a fresh DLL.
So, in the event you do find yourself going on tilt, just remember that Topstep is in your corner doing everything we can to help you trade for tomorrow!