Circuit breakers: daily loss limits, cooling-off periods and when to stop
Design layered stop rules in R and euros, with cooling-off periods and a restart protocol after losses.
What you will learn
- How to design daily, weekly and drawdown-based circuit breakers in R and in euros.
- Why breakers must count actual losses, including slippage and gaps.
- How to use cooling-off periods and a restart protocol with reduced size.
- How to make breakers hard to break, using broker tools and written commitments.
Explanation
On stock exchanges, a circuit breaker is a rule that pauses trading after a large price move. A personal circuit breaker works the same way: a predefined condition that stops you from trading for a set period. In lesson 6 you built a stop routine for tilt, which reacts to emotional signs. Circuit breakers react to numbers, so they work even when you do not notice your own state. Loss limits and recovery mathematics were introduced in the risk management course; this lesson turns them into a complete system.
Types of breakers
- Daily loss limit: for example −3R realised in one day. When reached, no new trades until the next day.
- Loss-streak breaker: for example three losses in a row → a cooling-off period of at least 30 minutes away from the screen.
- Weekly loss limit: for example −5R in one week → stop until next week. If the remaining room is smaller than 1R, you stop too, because no full trade fits.
- Drawdown breaker: for example −8R from the last account peak → stop live trading for at least a week and run a full review.
- Behaviour breaker: one serious rule break (for example moving a stop further away) → stop for the day, whatever the result.
Cooling-off and restart
A cooling-off period is a fixed time without trading. Make it long enough for the stress response to settle and use it for something physical: a walk, food, water. After a weekly or drawdown breaker, restart with a restart protocol: half size for the next five trades, then return to normal size only if the rules were followed on all of them.
Making breakers hard to break
Write the breakers into your trading plan. Use broker tools where available, such as loss limits or account lock features; check what your broker offers, because features differ. Tell an accountability partner your limits. The aim is to decide before the losses, when you are calm.
Worked example
Hypothetical example: account €20,000, risk 0.5% per trade, so 1R = €100. Breakers: daily −3R (−€300), weekly −5R (−€500), drawdown −8R (−€800) from the peak. Fees and taxes are excluded; slippage is included because it is part of the real loss.
- Monday: one loss of −1R and one small loss of −0.2R. Day total −1.2R = −€120. No breaker triggered.
- Tuesday: first trade −1R, second trade −1R. The third trade gaps through the stop and closes at −1.6R. Day total = −3.6R = −€360. The daily breaker (−€300) has been exceeded, so trading stops for the day. Note that the planned risk was 1R per trade, but the gap made the actual loss larger.
- Week so far: −1.2R + (−3.6R) = −4.8R (−€480). Remaining weekly room = 5R − 4.8R = 0.2R (€20). This is less than 1R, so the weekly breaker also applies: no more trades this week.
- Next week: restart protocol at half size, 1R = €50 for five trades.
Common mistake
Practice activity
On paper: a hypothetical trader has a €8,000 account and risks 1% per trade. The breakers are: daily −2R, weekly −4R, three losses in a row → 45-minute pause. (a) Express each limit in euros. (b) On Wednesday the trader loses −1R, −1R and the next planned trade would risk 1R. What happens? (c) The week before Wednesday was −1.5R. How much weekly room remains after Wednesday?
Show solution
(a) 1R = €80. Daily limit = 2 × €80 = €160. Weekly limit = 4 × €80 = €320.
(b) After −2R (−€160) the daily breaker is reached, so the third trade is not taken. The loss-streak rule is not reached (only two losses), but it no longer matters.
(c) Week = −1.5R − 2R = −3.5R. Remaining room = 4R − 3.5R = 0.5R (€40). Less than 1R, so trading stops for the week.
Limitations: a loss limit cannot stop a single position from losing more than planned in a gap or fast market; it only prevents further trades.
Key takeaways
- Circuit breakers are numeric stop rules that work even when you do not notice your emotional state.
- Use several layers: daily, loss streak, weekly, drawdown and behaviour.
- Count actual losses including slippage and gaps, not just planned risk.
- Restart after a breaker with reduced size and return to normal only after rule-following trades.
Next step
In the next lesson you will look at herd behaviour, social media and outside opinions, and how they can pull you away from your own plan.
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