When trading with a proprietary trading firm, one of the most critical rules every trader must understand is the Daily Loss Limit. This rule exists to protect both the trader and the firm from major financial damage caused by emotional or uncontrolled trading. Prop firms such as PAX MARKET FUNDS enforce daily loss limits to make sure traders follow proper risk management, discipline, and professional trading standards.
Many traders fail prop evaluations not because of strategy, but because they ignore or misunderstand the daily loss limit rule. Understanding this rule correctly can help you maintain consistency, avoid violations, and progress to becoming a profitable funded trader.
What Is a Daily Loss Limit?
A Daily Loss Limit is the maximum amount a trader is allowed to lose in a single trading day. If a trader’s loss—either from closed trades or floating open positions—exceeds this limit, the account is considered breached and may be closed or disqualified.
This rule prevents traders from blowing the account in one bad trading session due to:
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Revenge trading
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Over-leveraged trades
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High-risk decisions during news spikes
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Emotional decisions after losses
How Daily Loss Limits Work
Daily loss limits are typically calculated as a percentage of the total account balance. For example, if a prop firm provides a $100,000 account with a 5% daily loss limit, then the maximum loss allowed per day is:
Daily Loss Allowed = $100,000 × 5% = $5,000
If the trader loses $5,000 or more, the account violates the rules and can be closed immediately.
Examples of Daily Loss Limit in Action
| Starting Balance | Daily Loss Limit % | Max Allowed Loss Per Day |
|---|---|---|
| $10,000 | 5% | $500 |
| $25,000 | 4% | $1,000 |
| $50,000 | 5% | $2,500 |
| $100,000 | 5% | $5,000 |
Example Scenario
| Trade Results | Outcome |
|---|---|
| Closed trades loss –$3,000 + open floating loss –$1,800 = –$4,800 | Safe |
| Closed trades loss –$2,500 + open floating loss –$2,700 = –$5,200 | ❌ Daily loss limit breached |
❗ Even if the price later returns to profit, touching the limit even for a second counts as a violation.
Types of Daily Loss Rules
Prop firms may apply different structures such as:
1. Fixed Daily Loss
Limit remains the same every day
Example: $5,000 every day regardless of balance change
2. Relative Daily Loss
Limit adjusts depending on the previous day’s closing balance
3. Balance-Based Rule
Calculated from the day’s start balance
4. Equity-Based Rule
Calculated including floating losses on open trades (real-time)
PAX MARKET FUNDS -type prop firms may use equity-based daily loss monitoring because it reflects real market exposure.
Why Daily Loss Limits Exist
✔ To prevent large account drawdowns
✔ To protect firm capital
✔ To train traders to use risk management
✔ To prevent emotional and revenge trading
✔ To ensure professional trading behavior
Prop firms want disciplined traders, not gamblers.
What Happens If You Break the Daily Loss Limit?
Breaking this rule leads to:
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Account termination
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Challenge failure
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Loss of payouts or scaling eligibility
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Required repurchase or reset
Some firms allow resets at a fee, but funded accounts may be closed immediately.
In short:
You don’t lose because your strategy was bad — you lose because rules were violated.
How to Stay Within Daily Loss Limits
1. Risk Small Percentages
Use 0.25%–0.5% risk per trade.
2. Set a Personal Soft Daily Limit
If daily limit is 5%, stop at 2%–3% yourself.
3. Avoid Trading During High Impact News
Especially if your firm restricts news trading.
4. Trade Only High-Probability Setups
Avoid forcing trades.
5. Stop Trading After Hitting Profit Target
If you made 1–2% profit, lock in and walk away.
6. Use a Trading Journal
Track behavior and improve decision making.
7. Use Stop-Loss Always
Never trade without risk placement.