The 6% Monthly loss limit

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?

Need comments on this.

Thanks

If you are a 'system' trader(as against a 'method' trader) then I can see some sense in it, as systems will only ever work during market conditions which are compatible with your system. Every system will go through periods when the wheels will come off and, as risk management is far and away the most important component part of trading, it's vital that you recognise as quickly as possible when this is happening and stop the bleeding.

You'll have to experiment with the rules and find which ones can you bend.
How about trading smaller lots after a 2% loss? Say, you lose 2% then risk only 1.5% next time and if you lose again then 1% then 0.5%? If you win you can up that risk again a little.

You could stop trading for a while after 5% loss or 10% or as soon as 3%. Up to you. Try it, find what's best for you.

Flexibility = survival

i will say don't give up no matter how hopeless


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trade with confidence

Hello Ceasar95 - You are potentially on a very important train of thought here. Please allow me to add a few other things for you to consider, along the lines of your current questioning:

Take a step back and ask yourself, "what is the capability of my method/system?"

eg - what is my expected profit range in a month?
what is my expected loss range in a month?
from approx how many trades?

So - what is my expected rate of return from the system(s) I currently trade? If I have a positive month, how positive should it be; if I have a negative month, how negative should it be; What should my ratio of positive vs negative months be, etc. And yes, this does apply to both discretionary as well as mechanical systems.

If you cannot answer these questions, STOP TRADING, and seek to find out before commencing trading again.

If you do know the answers to these above question, then you already have your answer to the "6%" question. Why?

If you understand the basic capability of your trading system (ie how much profit and/or loss it is likely to deliver) then you will know what an acceptabale range of profit and loss in a month is... AND you will be able to clearly identify where your results are significantly outside of that expectancy (eg on a monthly basis), and therefore what the trigger point is stop trading and find out what is going wrong. It might be 6% loss for you, it might be 2% loss for someone else, or 12% for another... it all depends on the capability of your system. Your "system" being YOU, plus the documented rules that you follow to enter and exit trades.

Is this practical? ABSOLUTELY! When I learnt about the above, and put it into practice in my trading, it made a BIG difference - all of a sudden I had the required method to identify and remove a lot of crappy trades out of my trading plan, and focus on those that met my risk appetite, and that delivered high probability results.

This is about delivering SUSTAINABILITY in your trading - to help you be a profitable trader in years to come - I would argue that you can probably do ok for a few months or even a year without fully understanding the capability of what you are trading (and indeed it could be an emerging property as you gain more experience - a whole new thread required here) but without a basic understanding of some of this stuff it will be very easy to fall into the very large bucket of those who ultimately fail - as I almost did.

Get the METHOD right which will help you understand your system capability (and therefore allow you to 'predict' your results), and use this to improve your actual trading mechanics, and you will stand a better chance of prospering in your trading.

Hope that helps.