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The Circuit Breaker Part 2

Loss Limits Based on Time
Limiting losses from individual trades is very important.  However what most traders do not do is limit losses over a specific period on time.  Everyone goes into streaks where they get hot and cold. We may have a string of winners followed by a string of losers.  When we fall into a losing streak the best thing to do is limit those losses to a certain time frame.  To take our loss limit a step further we should establish a circuit breaker that prevents extensive overall losses during a one week or one month period.  Day traders can even take it further and have daily loss limits. 

A rule of thumb for overall monthly losses is a maximum of 5% of our portfolio.  As soon as our account equity dips to 5% below what we started the month with stop trading! At that point our circuit breaker trips and we have to stop trading take a breath and take a break.  Take this down time to regroup analyze the problems observe the markets and prepare for reentry when we are confident that we can prevent it from happening again. 

Don't forget when implementing both the single trade limit and the weekly/monthly loss limit we will need to recalculate our trading positions every week month or what ever time frame you decide on. For example if we enter a new month having realized significant profits the previous month we should adjust our stops and the sizes of our orders so that no more than 1% of the newly calculated total is exposed.  We cannot forget this important point.  Remember when our account rises in value by the end of the week/month the 5% rule of thumb will allow us to trade with larger positions the following week/month increasing our portfolio size much faster with each winning trade.  This is the power of compounding and what makes the STHQ system so profitable.  Be advised also that the reverse is true if we lose money one week/month.  If our capital decreases on one then the following week/month will ensure that our position size on each trade will be smaller than the month prior.  Should our losing steak continue our losses would be smaller because we have decreased our position size.  This is great protection for our capital.  Remember we want to win big and lose small.

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