No matter which day trading strategies you employ, minimizing losses is an integral part of engaging the futures markets competently. However, this can be a challenging task in fast-moving, volatile markets. Fortunately for active traders, there are a few ways to cut losses before they become debilitating.
Let’s take a look at how to manage capital drawdowns using limit orders, stop-loss orders, and daily trading plans.
The Value of Limit Orders
At a base level, futures trading is the act of buying and selling contracts in an attempt to profit from pricing fluctuations. To accomplish this objective, it is necessary to frequently enter and exit the market. You can do this in a variety of ways, but using limit orders is one of the most efficient methods.
A limit order is a type of order that directs the purchase or sale of a security at a specific price or better. Traders employ limit orders in countless day trading strategies because they offer two major functional benefits:
- They minimize slippage: Slippage occurs when the price at which an order is filled differs from the intended price. Limit orders are filled at a certain price or better, mitigating losses associated with slippage.
- They’re ideal for profit targets: Because limit orders rest at the exchange until elected, they function well as profit targets. For an open long position, profit targets are sell limit orders located above price; for open shorts, a buy limit order is placed beneath price.
Limit orders are ideal for market participants interested in optimizing trade-related efficiency. They reduce the negative impacts of slippage and promote precise market entries and exits. If your strategy is prone to losses from such factors, limit orders can help reduce related drawdowns.
Avoid Catastrophe with Stop Losses
As the old trading adage goes, “It’s not how much you make, it’s how much you don’t lose.” This statement is an oversimplification of a complex subject, but it does ring true: If your losses are too big, then no amount of winning trades can erase them.
One way to limit losses and account drawdowns is through the use of stop-loss orders. A stop-loss order is an order placed at the exchange to cut off losing trades at a specific price point. For open long positions, a sell stop-loss order is placed beneath price action; for shorts, buy stop-loss orders are placed above price. When the stop loss is triggered, it becomes a market order and is immediately filled at the best available price.
Stop-loss orders are a key component of most day trading strategies. They make sure that open positions have a concrete exit, thereby reducing the chance of catastrophic loss. Although locating stop-loss orders properly is often compared to an art form, these orders are extremely useful in quantifying and minimizing capital drawdown.
Have a Plan
Perhaps the single best way to manage losses is to have a daily trading plan. A good plan outlines the parameters for market entry, market exit, and applied leverage. A daily plan can minimize your financial losses by using the following devices:
- Maximum daily loss: Assigning a maximum daily loss to an account limits the amount of money that may be lost in a single session. By setting such a threshold, you insulate the trading account against sudden, severe capital drawdowns.
- Align risk to reward: Understanding the relationship between a trade’s upside potential and downside risk is a key element of cutting losses quickly. By focusing on trades that have a positive risk-to-reward payoff, you can make your losses more manageable.
One of the key aspects of day trading strategies is that profits and losses are realized on compressed time frames. Capital is not tied up in a single position for multiple days, weeks, months, or years―it’s constantly in motion. That means it’s imperative that you have a clear plan that promotes consistency. If not, losses stemming from emotional, haphazard trading can be swift and extreme.
Interested in Learning More Day Trading Strategies?
If you’re an aspiring futures market participant, then choosing a strategy is a critical step in your journey. A great place to learn about trading methodologies is StoneX's Futures & Options Strategy Guide. In it, you’ll find 21 futures and options strategies designed to take your trading to the next level.
