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I thought I would share some more tips on how to keep from going over without being conscious of it. I have been working on this.
* Slow down your trading. I looked back over the recent times I blown my loss limit and virtually every time it was due to re entries after stop outs. A quick succession of moderate sized losing trades can swing one from even a significant profit to sizable loss.
* If you use a tighter stop loss then the most likely explanation for going over is that your losses are serially correlated. Serial correlated losses are going to be primarily caused by not understanding the (1) market regime, (2) poor entries, or (3) wrong sided bias. Entry, stop, and target determine if you will stop out. One possibility to try to reduce certain types of correlation is to force opposite side trades.
* If sticking to moderate/small stop loss, pick nearer targets and slow down trading.
* Think about trying to automate your stops or targets or both.
* Shut down sooner.
* As you increase leverage/decrease stop size, you will lose market information. There are very key relationships between how you need to trade with less vs more market information preservation. Generally, if you preserve market information you can adapt better to changing markets. However, you will have to take more tail risk. If you move toward trading with tighter limits, you cannot normally preserve the market information and instead must move toward probabilistic trading vs. adaptive trading. All this has important ramifications as to how much risk you should take per day. As you increase contracts because you cannot preserve information, you generally want to decrease your loss limits.
* Become more selective as you lose. There can be tendency to become less selective. In general, you should become more selective which will slow down the losses.
* Contrary to others experience, it looks like it might be possible to trade more contracts in more volatile markets to a point. The reason is you can get higher R trades. When markets are less volatile typically you want to keep size down because you will be trading low R trades (high relative risk) and if volatility jumps you will be more likely to get stopped out.
* Being discipline in itself will not make one profitable. It will slow down losses. However, this is one of the problems with a strict daily loss limit. Rationally, you know that unless your trades are serially correlated then it won't help you except for as a psychological tool. What I think might work better is to think about it as a time out, if you hit your loss limit you take a break. You can also try dividing your loss limit up into each portion of day so you aren't locked out for the entire day. Normally if markets are more volatile you have a better probability of recovering some losses whereas less volatile markets make that less likely.
Can you help answer these questions from other members on NexusFi?
As I am trying to work through this in my own trading, I thought I'd share there are 3 distinct reasons one may exceed a daily loss limit with distinct causes:
1. Have a single trade or position go over the limit.
2. Open a series of losing trades in fast succession without being consciously aware of running p&l. Run of losses.
3. Consciously decide to open a new trade after evaluating the loss limit.
For all the ways of going over a limit, type 1 is the most the risky because the loss can build/grow without taking any action. I think most traders know not to average down. But, there is still a risk if you are allowing yourself to take multiple trades on the same instrument of going over your desired risk or trying to use additional trades/signals to bring a position to delta neutral. The technique requires a larger account to work. An alternative technique might be to look for opposite side scalps. Type 1 losses can also happen when trading many contracts and using mental stops and/or when sharp violent market actions.
Type 2 losses are normally caused by making re-entries in rapid succession. Slowing down and become more aware can fix this issue. Type 2 losses are generally going to be caused by wrong volatility assumptions or serial correlation of losses. Type 2 losses require action to be taken and are generally an awareness problem for higher frequency scalpers.
Type 1 and type 2 losses can both be caused by specific types of trade confusion, as well. Such as opening a trade for a scalp and then just deciding to carry it because you planned to open a new trade in the same direction anyway: that's a recipe for large losses or trying to open a position that requires more risk/room to work with a tiny stop loss and then opening several such trades in rapid succession.
Type 3 losses both mandate awareness and action and so are not the same as other ways of going over a loss limit. The risks are that (1) you aren't reading the market well, (2) won't trade the same if you weren't down so much, (3) may make emotional decisions or factor in your p&l in a way that isn't meaningful, and even (4) if you make a good trade and it by chance increases the loss on the day then it may impact future performance..
1) EXPECT loss. Call it your cost. Set a daily cost target. Meet the target daily. Then stop trading for the day or turn to paper trade. This is COST management.
2) Trade 1 lot only. Under all circumstances.
3) Make as many trades as you can adhering to point 1 & 2. Meeting the daily cost target and your day is done.
4) Record, reflect, repeat.
If you exceed your daily cost target, you know what the problem is. Don't do it the next day.
If you can't meet your daily cost target, you're trading too few.
If you meet your daily cost target and still want to trade, you're getting emotional, stop trading and head to the gym.
By month end you should have a small sample of point 4 to share and discuss here.
As for missing out on big winners the key is to get on base.
