Equity stop loss (or) 2% limit loss

As the name suggests, this type of stop loss is based on the risk you will take with respect to the amount of equity you have in your trading account. Since this is rather simple to comprehend, most beginners quickly adopt it. We agree, it's a good stop loss method to begin with and definitely better than having none at all.

Different people take varying degrees of risks. However, we recommend as a rule of thumb to start at a 2% risk level. So when establishing your position, place a stop order within a maximum of 2% loss of the total equity in your account. A lower level of risk is perfectly acceptable if the individual trade or your risk tolerance level is lower.

Many professional traders consider 2% to be high and prefer losses to be limited to around half a percent of their portfolios. However, they do manage accounts that run into $100,000 and sometimes millions. So it's not the comparable.

Monthly threshold

In addition to defining the per trade risk level you can add another level of caution. Imagine have a losing streak of 15 trades at 2% of the initial capital. The result is a drawdown of 30% of initial capital. Now you don't want that. This is also an indication that something is fundamentally wrong with your trading plan and system.

We recommend you set a monthly threshold of 6% to 10% depending on your risk level. Once it hits the level, close all trading positions and go back to analysis phase to find out what went wrong. Return only after you find the root cause of the problem and have a better tested trading system.

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