What loss limit put to my operations?

 

Again, as always I speak of losses, I must start by saying that the article is completely impossible to avoid losses. More sooner or later they come to everyone. A good trader simply accept them consciously, which also involves applying a systematic rules to keep the controlled losses.

This article will not discuss the position of the stop loss, it will focus on the volume loss limit that should make trading operations. That is, the maximum amount of money that would be lost if the operation goes wrong. Knowing this amount is essential to calculate the size of the operation.

The basic concept: the loss limit as a protection mechanism
Each trader should establish, as part of your trading system, a loss limit a maximum amount of money you can lose in a single operation. It is very common set this limit as a fixed percentage of total capital, usually the equity or balance. The other great option, although much less used, is to set the limit losses as a fixed percentage of capital employed in the operation.

Whatever the set limit, once the operation reached the operation will close. Think of it as a protection mechanism and follow it to the letter. You have nothing to think about when the losses have reached the limit, I had thought before and had decided that that was your acceptable limit, now fulfill your plan. This prevents emotional conflicts, one of the main sources of failure in trading.

2% of equity per transaction, an acceptable limitThere are numerous different opinions about that percentage of capital used as operation limit losses. Really numerous. One of the most common and used, by far, is 2% of the assets of the account. If you have a net worth of 100 USD in the next step to open put a limit of maximum loss of 2 USD.If you notice, the preceding paragraph may release the following: the loss limit is known even before you decide how much, when or in what direction you operate. Of course, a lower limit is completely acceptable and you can place it in any value in the range 0 to 2%.Some use the balance of the account instead of equity to calculate the loss limit. From my point of view to use the heritage is a major advantage. Because the heritage reflects the profits and losses of open operations, it allows us to limit losses will adapt to the volume of our heritage at all times (difference balance and equity). So if we open operations globally add up losses, assets will be less than the balance and the loss limit will be lower. Conversely, if the open global operations added benefits, equity is greater than the balance and allows us to put a limit greater losses.In both situations, if you calculate 2% over the balance you are not realistically reflect the situation that is your own. If you have net earnings in a given time and are still using the balance to calculate the loss limit, not entail a lot of stress, you're actually decreasing the limit of 2%. But if at that time have net losses and you're still using the balance, you're actually taking a greater risk than 2%.Although the 2% limit is the most used and, from my point of view, is very acceptable, no reviews for all tastes. Some think that this limit is too small and that leaves the door closed to high volume operations relative to capital limiting the ability of short-term gain. There for whom 2% is too high and preferred a maximum risk of 0.5%. Usually, those who think it is too small, often traders with accounts of small-cap who want to open large operations, which do not allow the limit of 2%, and those who think it is too high tend to be conservative traders in risk aversion and often manage large portfolios.

6% monthly limitYou have set a loss limit of 2% of your equity for each operation. And that's it? Can you imagine if you lose 2% of the value of your account for 10 consecutive days? The account value catastrophic decline 20% in a short time. In addition to limiting operating losses, they should also limit monthly losses to an acceptable ceiling that you are comfortable. One of the most used monthly limit is 6% in combination with 2% per transaction.In this case there is much more variety of opinions. There are many traders who have no monthly limit losses and there are those who put this limit for upper and lower periods of time. For me the monthly period is at an acceptable middle.This limit operates as follows. The last day of each month notes heritage. During the next month this will be our reference. At the end of each day it is calculated heritage and as soon as it drops below 6% compared to the reference value should stop operating this month. He spends the rest of the month to observe and analyze the market.Like the 2% rule, the rule of 6% to increase or decrease the limit losses based on the results that are obtained. If in one month you made a profit, the next month you will have larger operations with more volume, because the loss limit will be higher. Conversely, if a month you end up with losses next month limit losses will be smaller and the volume of operations. In short, they are rules that allow scalability extending the benefits without increasing the risk assumed.