Risk Limits That Keep You Profitable: Daily Loss Limits, Max Trades, and Correlation Rules
Risk Limits That Keep You Profitable: Daily Loss Limits, Max Trades, and Correlation Rules
Set simple risk limits that prevent blow-ups: daily loss limits, max open risk, correlation caps, and rules for losing streaks.
Risk limits are the guardrails that protect you from bad days and emotional decisions. A strategy without limits eventually fails under stress.
Daily loss limit
Define a daily stop in R. Typical ranges:
- Conservative: -2R
- Moderate: -3R
- Aggressive: -4R (only if highly systematic)
Once hit, stop trading for the day.
Max open risk
Open risk is the sum of risk across all live positions. Many traders cap this at 2R to 4R to avoid hidden leverage.
Correlation rules
Three trades that depend on the same market move are one oversized bet. Cap correlated trades or reduce size when stacking.
Losing streak rules
- After 3 losses: reduce size or stop for the day.
- After 5 losses: review journal and market conditions.
- After 8 losses: pause and backtest assumptions.
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