Steve Gomez and Andy Lindloff on Money Management

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This simple money management rule acts as a circuit breaker for your active trading capital. Let’s face it; every active trader has a bad streak from time to time. The good traders often find a way to correct what is wrong or not working. During that time is when a trader can do the most damage to their accounts if not checked. Having a rule that says “I will not lose more than a certain dollar amount per day” is a wise rule. Pitching coaches take pitchers out of the game when they do not have their normal “stuff” working. A good trader needs to know to pull him or herself out of the game as there is no coach to do it for you.

What is a good level of pain to use when setting a daily downside stop loss to your trading account? That is certainly a subjective question, as everyone has a different level of pain tolerance. If you have anything more than a 2% daily risk to your trading capital, I would evaluate how that is working for you. Some people can mentally take more of an intraday drawdown than others. If you are the type who is not so cool under pressure and tend to make irrational decisions in this state of mind, 2% might even be too high. If you are one who may not trust themselves enough to implement this rule, call your broker and most of them are happy to lock you out on their end. This way, you never have to fight the urge. The system locks you out until the next day.
Source: Chapter 41 – Change is the Only Constant by Steve Gomez and Andy Lindloff, @todaytrader

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