# Risk Management: Daily Loss Limits and Drawdown · DT Academy > Daily loss limits, max drawdown, correlated positions, cutting size in a drawdown and risk of ruin: build a risk plan that fits prop firm rules. [Back to The DT Intensive](https://www.thedtterminal.com/academy/courses/dt-intensive) Day 19Managing risk in the strategy Chapters done # Managing risk in the strategy Day 19 of 26 · 9 min read · By DT Terminal Sizing one trade is the start. A strategy also needs limits above it: a daily loss limit and a cap on trades, weekly and maximum drawdown limits, a rule for correlated positions and for cutting size in a drawdown. This lesson builds that plan, shows why risk of ruin depends on size, and how prop firm limits fit inside it. Unlock the full lesson in the app Worked examples, the quiz and the interactive tools are in the app. Free account. [Continue in the app, free](https://www.thedtterminal.com/login?signup=true&redirect=%2Fjournal%2Facademy%2Fmanaging-risk-in-the-strategy) Chapter 1 of 7 ## From one trade to a risk plan In [Day 4](https://www.thedtterminal.com/academy/how-to-choose-your-risk) you sized one trade. That protects you from one trade. It does not protect you from ten in a bad week, or the angry trade after the third loss. A **risk plan** is the set of limits above the single trade. Each is a bigger box around the one before, and each says in advance what you do when it is reached. One example plan: Risk plan four limits, one above the other [Replay in the app](https://www.thedtterminal.com/login?signup=true&redirect=%2Fjournal%2Facademy%2Fmanaging-risk-in-the-strategy%3Fsection%3Drisk-plan%23risk-plan) An example plan on one scale. Each limit is a bigger box around the one before, and each says what happens when it is reached. You need not copy these numbers. What matters is that every layer exists, is written down before you trade, and that **reaching it means you stop**. **Decide your limits while you are calm, and follow them when you are not.** Write them first, so the decision is already made. **Go deeper** Sizing one trade means picking a percentage, putting the stop where the idea is wrong, and working out the lots. **A limit you decide in the moment is not a limit.** The moment you most want to break a limit is the moment after a run of losses, when your judgement is at its worst. That is why the limits are written first. Chapter 2 of 7 ## A daily loss limit and a max trades per day A **daily loss limit** is the most you let yourself lose in a day. Reach it and you stop until tomorrow. At 1% a trade, a 3% limit is 3R: three full losses. A **max trades per day** caps the count, win or lose. **Whichever comes first ends the day.** Worked example ### Example 01: One bad Monday on a $10,000 account The worked example, with every number walked through, is in the app. [Continue in the app, free](https://www.thedtterminal.com/login?signup=true&redirect=%2Fjournal%2Facademy%2Fmanaging-risk-in-the-strategy%3Fsection%3Ddaily-limits%23daily-limits) Free account Set the limits in the Risk Engine Build a risk preset and check its drawdown projection against your caps. **Go deeper** In the example the setups are the same both ways. The only difference is whether the day had an end, and the limit counts the day's closed losses. Check the projection against your daily and weekly caps. Measure the daily limit from the balance you started the day with, in percent or in R. The trade cap does the same job from the other side: a choppy day cannot turn into ten small entries that each felt reasonable. A common pairing while you learn is a daily limit of 2% to 3% and a cap of 2 or 3 trades. In the example you risk 1% of $10,000; the two extra trades at double size are 2 x $200 more, the usual attempt to win it back. Chapter 3 of 7 ## Weekly and maximum drawdown limits A **drawdown** is how far the account has fallen from its highest point. A **weekly limit** stops a bad run of days; a **maximum drawdown** is the floor under the whole plan. Stop early, because **every percent lost takes more than a percent to win back**: Recovery the gain needed to get back to the start [Replay in the app](https://www.thedtterminal.com/login?signup=true&redirect=%2Fjournal%2Facademy%2Fmanaging-risk-in-the-strategy%3Fsection%3Ddrawdown-limits%23drawdown-limits) The red bar is the loss. The green bar is the gain on what is left that takes you back to where you started. The gap grows faster than the loss. | Drawdown | Gain needed to get back | | --- | --- | | 5% | 5.3% | | 10% | 11.1% | | 20% | 25.0% | | 30% | 42.9% | | 40% | 66.7% | | 50% | 100.0% | | 75% | 300.0% | The gain needed is **the drawdown divided by what is left**: dd / (1 minus dd). Write an action next to each limit: - **Weekly limit reached** (say 6%): no live trades until Monday. Review the week. - **Maximum drawdown reached** (say 10% from the peak): stop trading live; go back to demo or the backtester. **A drawdown limit is a review, not a punishment.** Stop with most of the account left, and find out what changed. **Go deeper** Why the gain needed is bigger: a loss comes off a bigger number than the gain that repairs it. Review the week against your rules when the weekly limit is reached. A monthly limit works like the weekly one. At the maximum drawdown, go through every trade since the peak and find out whether the losses came from the strategy or from breaking it. Stay on demo or the backtester until you have a reason to return. Hitting the floor means something changed: the market, the strategy or you. Stopping gives you the chance to find out which, with most of the account still there to act on the answer. Chapter 4 of 7 ## Correlated positions are one bigger bet Two pairs are **correlated** when they tend to move together. `EURUSD` and `GBPUSD` are both priced in US dollars, so a long on each is **one bet against the dollar, taken twice**. DT Terminal Charts EURUSD · H1 DT Terminal Charts GBPUSD · H1 Worked example ### Example 02: Two longs against the dollar The worked example, with every number walked through, is in the app. [Continue in the app, free](https://www.thedtterminal.com/login?signup=true&redirect=%2Fjournal%2Facademy%2Fmanaging-risk-in-the-strategy%3Fsection%3Dcorrelated-positions%23correlated-positions) Free account | Pair | Often moves | Why | | --- | --- | --- | | `EURUSD` and `GBPUSD` | Together | Both are priced in US dollars | | `EURUSD` and `USDCHF` | Opposite | The dollar sits on opposite sides of the two | | `XAUUSD` and the dollar | Opposite, often | Gold is priced in dollars, so a stronger dollar tends to weigh on it | | `US500` and `NAS100` | Together | Both are baskets of large US companies | **Tendencies, not laws.** Correlations shift over time and can break on a single release, so check what your pairs are doing now. **Count correlated trades as one position.** Add up the risk on open trades that share an idea. If it tops your risk per trade, cut each size or take only one. **Go deeper** Same hours, two longs: `EURUSD` long at 1.08650 and `GBPUSD` long at 1.27050. One dollar release takes out both stops on the same candle. Anything that moves the dollar moves both pairs in the same direction: the climbs, the pullback and the drop line up because the dollar sits on the same side of both. In the example, 0.40 lots of `EURUSD` is $4 a pip and 0.33 lots of `GBPUSD` is $3.30 a pip. If you want both trades, split the risk instead: 0.20 lots and 0.16 lots put about $50 on each, $98 on the idea, which is the 1% you meant to risk. Long `EURUSD` and short `USDCHF` are both short the dollar too. Chapter 5 of 7 ## Cutting size in a drawdown, and earning it back In a drawdown the instinct is to trade bigger. Do the opposite: **cut risk per trade** once the account is a set distance below its peak, and earn full size back with results. Worked example ### Example 03: Half size at 5% down The worked example, with every number walked through, is in the app. [Continue in the app, free](https://www.thedtterminal.com/login?signup=true&redirect=%2Fjournal%2Facademy%2Fmanaging-risk-in-the-strategy%3Fsection%3Dcutting-size%23cutting-size) Free account Write the size rule into Trading Rules Add "Half size once 5% below the peak" as a During Trading rule. **Go deeper** Trading bigger digs the hole deeper, just when something may be wrong. Many traders cut size this way. At full size the plan says stop at the maximum drawdown; at half size you have room to find out what went wrong. The climb from $9,218.54 is slow, and that is the point: **full size comes back when the results do**, not when you feel ready. Another rule worth writing down: "Stop after 3 losses or 3% down in a day". Rules added in Trading Rules appear in the list you tick off in your daily pre-market plan. Chapter 6 of 7 ## Risk of ruin, and your own plan **Risk of ruin** is the chance a run of results takes the account to your maximum drawdown, the line where you stop. Even a winning strategy can touch it, because the order of wins and losses is luck. One strategy: 40% winners at 1:2, which [Day 9](https://www.thedtterminal.com/academy/the-math-behind-trading) showed makes +0.20R a trade. Only the risk per trade changes: | Risk per trade | Losses in a row to reach 10% | Chance of touching 10% down in 200 trades | | --- | --- | --- | | 0.5% | 20 | 1.8% | | 1% | 10 | 14% | | 2% | 5 | 37% | | 5% | 2 | 68% | Same edge, same 10% floor measured from the start, fixed risk on the account size, before costs. Exact, by counting every possible order of wins and losses. At 0.5% a trade the floor is 20 losses away, reached about 1.8% of the time. At 2%, more than a third of the time. **Size is what blows accounts.** Interactive tool ### Risk plan builder This interactive tool runs in the app, with your own numbers. [Continue in the app, free](https://www.thedtterminal.com/login?signup=true&redirect=%2Fjournal%2Facademy%2Fmanaging-risk-in-the-strategy%3Fsection%3Drisk-of-ruin%23risk-of-ruin) Free account **Smaller risk buys you more losses before the floor.** Pick a risk that puts the floor well beyond the losing runs your win rate makes likely. **Go deeper** Ruin is a level you cannot or will not trade on from. For a trader with a plan, that is simply the maximum drawdown. You do not need the formula to use the idea, and the edge never changed from row to row: size is what turns a good strategy into a blown account. You cannot control the order of your wins and losses. You can control how many losses your plan can absorb. Build your own plan in the builder above and see where each limit lands. Chapter 7 of 7 ## How prop firm rules fit your plan A prop firm challenge, covered in [Day 25](https://www.thedtterminal.com/academy/prop-firms-and-brokers), comes with its own version of this plan: a maximum daily loss and a maximum overall loss. Breaking the firm's limit ends the account, so **yours sit inside it**, with room to spare: | Your plan | The firm’s rule | How they fit | | --- | --- | --- | | Risk per trade | Rarely set by the firm | Yours alone. It decides how many losses fit inside each limit | | Daily loss limit, say 3% | Max daily loss, **often 5%**, often measured on equity | Keep yours below the firm’s, so a slipped stop or an open trade cannot fail the account | | Max trades a day | None | Yours alone. It stops the revenge trade before any limit does | | Maximum drawdown, say 6% | Max overall loss, **often 10%**, static or trailing | Stop and review with room left, not on the line that closes the account | | Correlated trades as one | Open trades count together on equity | Two trades on one idea use up the daily room twice as fast | The buffer matters because **the firm usually measures on equity**, open trades included. A stop that slips on news, or two correlated trades, can breach a limit your closed trades never touched. Quick review ## Check yourself Quick review · 0 of 0 [All lessons in The DT Intensive](https://www.thedtterminal.com/academy/courses/dt-intensive) [Previous](https://www.thedtterminal.com/academy/managing-a-trade-after-entry) ## Managing a trade after entry Day 18 · 9 min read [Next in Learn to trade](https://www.thedtterminal.com/academy/backtesting-your-trades) ## Backtesting your trades Day 20 · 11 min read ## Try it on your own account Connect a broker and DT Terminal verifies every trade against it. Free to start. [Start free](https://www.thedtterminal.com/login?signup=true&from=academy&entry=closing_card&redirect=%2Fjournal%2Facademy) [Back to DT Academy](https://www.thedtterminal.com/academy) DT Academy is education, not financial advice. Nothing here is a recommendation to buy or sell any instrument. Trading carries a high risk of losing money, and past results, examples and backtests do not guarantee future results. [Risk disclosure](https://www.thedtterminal.com/risk-disclosure) --- Risk disclosure: Futures, forex and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one's financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. [Read the full risk disclosure](https://www.thedtterminal.com/legal/risk-disclosure). This is the Markdown version of https://www.thedtterminal.com/academy/managing-risk-in-the-strategy. 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