Loss limit

An administrative rule rather than an order sitting at the market. It is written into a trading plan before a session begins, and it names a loss and a period: per position, per day, per week, or measured from a peak in account equity. On a professional desk the equivalent is imposed and monitored by a risk function, with the trader's access to the market withdrawn when a limit is reached. A self imposed version has no such enforcement, which is the difference that matters most about it.

The bases in common use differ, and none of them is a definition. A limit may be a fixed money amount, a percentage of account equity measured at an agreed moment, a multiple of the amount typically risked on one position, or a count of consecutive losses regardless of their size. Each convention behaves differently as an account changes size: a fixed amount tightens in proportion as equity grows and loosens as it falls, while a percentage does the reverse. Published rules at professional firms use all four, which is a reasonable indication that no single basis has won the argument.

The most consequential confusion is with a stop. A stop loss order is an instruction resting at the market that becomes executable at a level and is filled at the next available price. A loss limit is a rule about whether further positions are opened at all, and it does nothing whatever about a position already running or about a gap through a stop, so an account can pass a limit without the limit having acted. Practitioners disagree about whether stopping when one is reached changes results at all, since the evidence is drawn from records of people who kept records, and that is not a neutral sample. What is less disputed is narrower: a threshold written down before the session can be checked against afterwards, while one recalled after the fact cannot.