Daily loss limit
Why do some traders stop trading for the day after losing a set amount, and what does that rule protect against?
In plain words
A daily loss limit is a rule that closes a trader's book and prevents new positions once losses in a single day reach a pre-set amount. The amount is chosen in advance, often as a percentage of account capital, and is not renegotiated during the day.
Why it matters
Losses compound fastest when a bad day is followed by rushed positions. A daily loss limit turns a large, open-ended outcome into a bounded one: the worst a single day can do is the set amount. It also forces a reset, so the next day starts from a known state rather than a depleted one.
In a real week: ETH, week of 28 February 2022
In the week of 28 February 2022, ETH's worst day was Friday 4 March, returning -7.48%, while its best day, Monday 28 February, returned 11.62%. A daily loss limit set below a fall of that size would have been reached on Friday, ending trading for that day. ETH closed the week -2.5% at 2551.29, after a 20.08% range between its high of 3043.91 and its low of 2535.0.
A common mistake
Treating the limit as a prediction of where prices will turn. It is a risk boundary, set without reference to the day's direction, so it can stop a trader on a day that later recovers.