Create Circuit Breakers to Preserve Your Sanity

Preserve your sanity by implementing maximum levels of allowable losses per day, week, and month.

When they are hit, you stop trading for that period of time.

For example, if you set a daily loss on your equity of 1% and you lose that much on your overall positions, you go flat.

If you have a 8% rule on your overall equity for the month, you quit for the month even if it's only the 21st of the month.

As you approach 8% for the month, you'll want to haircut your overall trading equity (what you base your positions on) by 20 or 30% so that your losses will be even smaller.

If you trade with protective stops in place (and you should), you can calculate how much of your equity you will lose if they all get hit.

You can do this with open trade equity and trailing stops also. It's a very helpful process.

 

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