There is a fine line between failing and making it as a trader. Whether you trade with a prop firm or trade for yourself it is important to have an appropriate stop loss. Having too small of a daily stop loss will keep you out of the game too many times and will impair your ability to grow as a trader. On the other hand, having too big of a daily stop loss will either break your account quickly or will put you deep in the hole during a slump.
I believe your stop loss should be proportional to the size of your bankroll and your level of experience. If you are a beginner trader, your stop loss should be smallest even if you have a large bankroll. As a rule of thumb your daily stop loss should be no more than 2% of your trading capital. And it should allow you to trade with the smallest size possible of 100 shares. In addition, for you active traders, your stop loss should accommodate your trading style such that it should take you several consecutive losing trades to reach your stop loss.
This last point is very important. You must get enough screen time in order to get better when you first start your career. Having a daily stop loss that allows you to take at least 8-10 consecutive loses in one day is crucial to your success. If your current system/stop loss combination does not allow you to do this then you have to consider lowering your tier size (assuming you are trading with more than 100 shares), being more patient and/or more disciplined. If you are already trading with 100 shares and have trading capital limitations, you must work on your trading system to make sure that you get enough screen time.
For those of you more experienced active traders trying to get bigger and better traders this latter point is quite important as well. You need sufficient data to help you identify what you are doing well and wrong. Getting stopped out on the opening session after a couple of consecutive losing trades is not the way to do it. And certainly increasing your stop loss to accommodate your recklessness is not the solution either! If this is you, you need to work on your tier size primarily, but this is a topic for my next blog so I don’t want to get ahead of myself here.
Now, for those of you more experienced there is one more thing you need to consider for a correct daily stop loss. That is, your stop loss should be no higher than about half of your average daily profit. Specially if you are the kind of trader who makes money 50-60% of the trading days in a month. This is even more important for those of you in a slump. Seriously the last thing you want is to spend the next couple of months making back the money you ripped up during a two week slump.
Your focus during the first six months of your trading career should be on learning this craft. Everyone must have well selected stop loss, should stick to it religiously AND you should not reach it often. You should not reach your stop loss more than twice a month. If you find yourself reaching your stop loss more than that then you should cut your size in half and focus on the fundamentals and plays that make you money. The point of the daily stop loss is to limit your risk in days when you are not feeling the market. Remember that you have a long career ahead of you, and having an appropriate stop loss will ensure you stick long enough to enjoy it. Enjoy your weekend.