Losses are a fact of trading. Unfortunately, those losses can come in a string for any number of reasons. Maybe the market just has been going against you, or maybe it is time to reevaluate your trading strategy. In any case, knowing when to step away from the trading desk sometimes can be the best thing for your trading account. Having defined daily, weekly and monthly loss limits can help to keep you trading for another day.
Rodock echoes this and says defined loss limits can keep you trading when others have been pushed out of the markets. “While it is imperative to determine the amount [you are] willing to risk on any given trade, many traders neglect to set daily, weekly and monthly drawdown levels. These longer-term risk levels can serve as excellent indicators that it is time to stop trading and reevaluate your trading system and plan,” he says.
This largely goes back to having a plan in place. By deciding before a situation presents itself what you are going to do, it can make it easier to do the right thing, even if you may not want to do it at the time. Remember, “this time is different” usually isn’t.