1. Trade Loss Limit
Let’s start with each trade.
The trade loss limit should represent the most you will risk on any one trade. Unless you are a very experienced trader with a successful track record, this should be about 1% or 2% of your overall account balance.
The reason for this, is to ensure that no one trade can wipe you out, and that your risk level gets adjusted depending on previous successes or downturns in performance.
PlayMaker takes your opening balance, and calculates the maximum loss default as 1% of today’s balance.
Then depending on the risk reward you have set as your target, it will calculate the profit target to aim for on each winning trade, such that you can deliver your risk reward metric.
If you choose to overwrite your trade loss limit, PlayMaker will always recalculate your target profit to ensure you are adhering to your risk:reward targets.
2. Daily Loss Limit
As well as protecting each individual trades, it is also important to protect your trading day.Setting a loss limit for each trading day means that you can quit trading early if the markets are not in your favour, thereby protecting your capital for another days trading.
Setting a limit that represents a percentage of your account balance, means that you will naturally reduce size if you have had a losing streak, thereby ensuring you can continue trading much longer, and gaining more experience. It also naturally increases size as you have profitable days thereby allowing you to start to increase the size of your risk.
This example shows the impact on a $10,000 account comparing someone who has a fixed loss limit of $500, compared to a trader who uses 5% of their opening balance.
If you are unlucky enough to have 20 losing days in a row, the fixed limit account will be reduce to zero. However in the dynamic 5% account, you can continue trading more than 3 times longer.
Similarly if you are in a great winning streak, your account balance will grow substantially more using the dynamic approach due to the power of compounding.
We recommend 5% of your overall account balance on any given day should be the most you should risk. You are able to set this to any levels you want. As soon as you log into PlayMaker you will be assigned your levels for the day. Make sure you do this before you start trading, and use your levels to calculate your stop and your limit settings for the day.
3. Open Trade Limit
Your open trades limit sets a maximum number of trades that you can have open at any one moment in time. There are a number of advantages to keeping this level low, particularly if you are new to trading.
Firstly, multiple markets moving together can get very stressful, and it can be easy to become overwhelmed in busy markets. Additionally, many instruments can be correlated very closely to each other, so having multiple positions can be similar to one very large position. This could lead to larger losses than normal.
We recommend an initial setting of 3 parallel positions. You can change this at any time.
Here we see a loss making trader who is profitable when he holds just one position.
4. Losing Streak Limit
Sometimes you follow your plan, you do everything right, but your trades continue to be losers.
This could be the market conditions, it could be a bad strategy, or it could just be bad luck.
Whatever the reason, the reality of a losing streak is that is causes high levels of stress, and increases the likelihood of undisciplined behaviour.
Psychologically, a losing streak can be a trigger for emotional and irrational trading. Use this guardrail to help keep your discipline during the trading day.
