Max Loss Rules: Protecting Your Account with the 1–2% Rule

In risk-reward,
position-sizing, and
atr-sizing we:

defined 1R (max loss per trade), and
learned how to calculate position size
so that a stopped-out trade loses exactly 1R.

In this article, we take a step up to the account level:

“How much am I willing to lose
in a single day, week, or month?”

This is where max loss rules come in.

1. Why you need max loss rules at all

Even traders with decent risk management can:

go through losing streaks, or
have days where emotions take over,

and on those days,
their usual rules tend to break.

Common scenario:

normally they risk 1R = 1% per trade,
but after three losses in a row, they:
- widen stops,
- increase size,
- and enter extra trades to “make it back”.

What’s missing here is:

a risk limit above the individual trade
— at the account level.

In other words, not just:

“How much can I lose on this trade?”
but also:
“How much can I lose today / this week / this month
before I stop or scale down?”

That higher-level structure is what we call
max loss rules.

2. Quick recap: 1R (risk per trade)

From risk-reward:

Account: 10,000 USD
Risk per trade: 1%

Then:

1R = 100 USD

And as position-sizing explains:

using the distance between entry and stop,
or ATR-based distance from atr-sizing,

we size positions so that:

Loss at the stop ≈ 1R.

This is the trade level.
Now let’s go up to daily/weekly.

3. Risk per trade vs max loss per day/week

A common framework looks like this:

Risk per trade: 0.5–2% of account (1R)
- Beginners: 0.5–1%
- More experienced: 1–2%
  (above that is quite aggressive)
Max daily loss: 2–4% of account
- Example: if 1R = 1%,
  daily max loss = 2–3R (2–3%)
Max weekly loss: 4–8% of account
- Example: if 1R = 1%,
  weekly max loss = 4–6R

These numbers are just examples.
They depend on your risk tolerance, strategy, and capital.

The key idea:

If cumulative losses reach a certain number of R,
you stop trading or switch to reduced size.

4. Example: applying the 1–2% rule to a 10,000 USD account

Let’s set up a simple rule set.

Account: 10,000 USD
Risk per trade: 1% (= 1R = 100 USD)
Max daily loss: 3R (= 3% = 300 USD)
Max weekly loss: 6R (= 6% = 600 USD)

4-1. Daily rule

If total realized loss hits −3R (= −300 USD) in one day:
- stop trading for the rest of the day,
- review charts if you want,
- but no new live trades until tomorrow.

4-2. Weekly rule

If cumulative losses Monday–Friday
reach −6R (= −600 USD):
- stop trading for the rest of the week, or
- switch to “reduced-risk mode” as discussed in
  drawdown
  (e.g. cut 1R from 1% to 0.5%).

With this structure:

even on bad days,
even during losing streaks,

it becomes much harder to blow up the account
in one emotional stretch.

5. What daily max loss actually protects you from

Here are some real-world situations
where daily max loss rules act as a safety net.

Revenge trading
- one loss → you get upset →
  you keep firing trades with weaker setups →
  and end up losing 5–10% in a single day.
Wrong read on the market that day
- your strategy just doesn’t fit
  today’s conditions,
- but instead of stepping back,
  you keep trying the same thing.
On days like this,
a max daily loss rule is a hard brake
when nothing else is working.
Fatigue and low focus
- poor sleep,
- heavy workload,
- external stress.

This isn’t about the setup;
it’s about:

“The trader is not in normal condition,
so the error rate is higher.”

Max loss rules are the last line of defense
against overtrading in that state.

6. Common mistakes with max loss rules

6-1. Writing the rule down but not honoring it

Most common mistake:

in your journal:
“Stop for the day at −3R,”
in reality:
at −3R you think:
- “Just one more,”
- “This one is a sure thing,”
- “I’ll stop after I make it back.”

Then:

you effectively have no rule at all,
and the illusion of “having rules”
can even make things worse.

A max loss rule only works
if it’s a non-negotiable switch:
once hit, you stop.

6-2. Setting max loss too high relative to your account

Example:

10,000 USD account,
2% risk per trade,
10% max daily loss (= −1,000 USD).

A handful of bad decisions,
and you’ve heavily damaged the account.

If your goal is longevity,
it’s more reasonable to:

cap max daily loss around
2–3R per day
to start with.

6-3. Ignoring strategy stats (win rate, R/R)

High win-rate systems vs lower win-rate,
high R/R systems
have different natural losing streaks.

For example:

with ~35% win rate and R/R = 1:3,
5–6 losers in a row is not unusual.

If such a system uses:

daily max loss = 2R,

it may be stopping too often,
even when the system is still working as designed.

So max loss rules should consider:

your average win rate, R/R,
and realistic losing streak length.

7. Checklist for designing your own max loss rules

Here are some questions
that can help you design rules that fit you.

“What is my current 1R
in %, and in actual currency?”
(risk-reward)
“What are the typical stats of my strategy?”
- approximate win rate,
- average R/R,
- typical losing streak length.
“Realistically, how many losing trades in a day
can I handle before my emotions start to tilt?”
“At what daily max loss (in R)
can I still think clearly,
and my account is not heavily damaged?”
“Do I have weekly/monthly max loss rules
that trigger a break, reduced size,
or a formal review if breached?”

Max loss rules are:

risk management at the account level,
above individual trades and setups.

If you:

build your R framework with
risk-reward,
control position size through
position-sizing and
atr-sizing,
and add the max loss rules from this article,

you give yourself a much better chance
of surviving the inevitable losing streaks
that every trader faces at some point.