I more or less copied it from what TopStepTrader allows and just rounded it down a little: I never expose more than 1% to risk in full position-sizing, and usually less - and I stop for the day if I've lost two full trades or the equivalent, on balance (so 2%). I'll stop for the week if I'm down 4%, but have so far escaped that fate.
I have a strange system which includes many close-to-breakeven trades (they actually make very small profits, net of dealing costs), and it's all designed to prioritize risk-management rather than profit-maximization. Although I don't hit that many runners producing big profits, losing two full trades is also thankfully pretty rare. It's not "play-money" or "hobby-money", for me: though I could always last a few months, if I needed to, in the long run I pretty much need some of the month's trading income, to live on and build my account.
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It makes sense in principle: it's a little bit arbitrary in practice, perhaps, because hitting it on a Tuesday (say) would be very different in outcome from hitting it on a Friday, but I suppose one could substitute something like a "4-or-5-days-off limit" instead.
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I think it depends on your Edge. If your trading plan/system calls for taking every setup then the one you miss because you just took 2 losses in a row might be the one that would have made up for those losses and made you profitable for the day.
When I day traded, which I donít now, I had a 25% drawdown rule where I would stop trading and re-evaluate my system. I had confidence in my edge that if I took every trade which presented itself I would be profitable overall. With a planned 35 to 40% win rate I had to be able to take several losses in a row in order to catch the eventual winners.
It is hard to find the Truth when you start your search with a preconceived notion of what the Truth will be.
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I think JonnyBoy makes an interesting point about the 5,000 in one's trading account. I guess one needs to discriminate between what you have in your trading account and your trading capital as a whole.
Especially when starting, I found that having a limited amount of money in my trading accoung helped psychologically by not making me reckless. There is the mental barrier of having to deal with margin calls if the account goes to close to margin.
So one could risk 1% of their trading capital but have only (say) 10% of their trading capital in their account. At least at the beginning.