Explainer
Daily loss limit explained
A daily loss limit caps how much an account may lose in one trading day; touch it and the day ends, so the rules must say what a day is and what counts.
Updated
The short version
A daily loss limit is a ceiling on how much the account can lose in a single trading day. It is separate from the overall loss limit. It resets, and the overall limit does not.
What happens when you reach it depends on the program. Some lock the account for the rest of the day. Some treat it as the end of the attempt. The rulebook says which.
- Daily loss limit
- The most an account may lose within one trading day.
- Trading day
- The period the program counts as one day. Its start and end are set in the rules.
- Realised loss
- The loss on trades that have closed.
- Open loss
- The loss on a trade that is still open.
What counts as a day
A futures day does not run midnight to midnight. The market trades through the evening, so a program has to say when its day starts and ends, and in which time zone.
This matters more than it looks. Two trades an hour apart can fall on different days if the reset sits between them. In our own method every clock time is America/New_York, and the session opens at 18:00 ET. A program can pick a different reset, so check yours.
Realised or open loss
Programs also differ on what counts toward the limit. Some count only closed trades. Some count open loss as well, so a trade that is down but not yet stopped can already use up part of the day.
If open loss counts, a wide stop uses room even when it is never hit. That changes what size you can trade for the same limit.
A daily limit is about the lowest day, not the average one. Read the lowest day in your test.
Turning the limit into a number of R
Divide the daily limit in dollars by the dollars you risk on one trade. That is the limit in R: how many full stops fit into one day before it ends.
Then look at how many losing trades in a row your rules can take in a single day. If they can take more than the limit holds, the rule will meet the limit before the market has shown you anything about the strategy.
Testing it on a backtest
Every trade in a run has a date, so you can group the trades by trading day and add up each day’s result in R. The lowest day is the one to compare with the limit.
Look at how often a day comes close, not only whether one breaks it. Then look at what in the rules produces a bad day. A rule that can re-enter again and again after each stop has no built-in stop for the day. A cap on trades per day or a time stop changes that, and you can test the change as a new version.
Costs matter here too. Commission applies to every trade, so a day with many trades pays it many times. Commissions and fees vary by broker; a backtest should use your own.
Questions and answers
What is a daily loss limit?
It is the most an account may lose within one trading day under the program’s rules, separate from the overall loss limit.
What happens when I hit the daily loss limit?
It depends on the program. Some lock the account until the next day and some end the attempt. The rulebook states which.
Does open loss count toward the daily loss limit?
In some programs it does and in others only closed trades count. Read the wording for yours.
When does the trading day reset in futures?
The program sets the time and the time zone. Futures trade through the evening, so the reset is not midnight by default. Our own session opens at 18:00 ET.
How can I check a strategy against a daily limit?
Group a run’s trades by trading day, add up each day in R, and compare the lowest day with the limit expressed in R.