The Loss Limit is the maximum amount an investor is willing to lose if the strategy performs unfavorably. If this threshold is reached, the investor’s account is automatically detached from the strategy, and all open positions are closed at current market prices.
The Loss Limit calculation includes:
- The net result of both open and closed positions
- All commissions paid to the trader
Examples of How the Loss Limit Works
Example 1
- Loss Limit: $300
- Initial Investment: $1,000
- Investor’s Profit: $500
- Additional Deposit: $400
The Loss Limit will be triggered when total losses reach $300 and the account equity is $1,100:
$1,000 (initial investment) + $400 (deposit) – $300 (Loss Limit) = $1,100
Example 2
- Loss Limit: $300
- Initial Investment: $1,000
- Investor’s Profit: $500
- Profit Withdrawal: $400
The Loss Limit is triggered when total losses reach $300 and the account equity is $700:
$1,000 (initial investment) – $300 (Loss Limit) = $700
Example 3
- Loss Limit: $300
- Initial Investment: $1,000
- Current Loss: $200
- Partial Withdrawal of Investment: $400
The Loss Limit is triggered when total losses reach $300 and account equity drops to $300:
$1,000 (initial investment) – $400 (withdrawal) – $300 (Loss Limit) = $300
Example 4
- Loss Limit: $300
- Initial Investment: $1,000
- Partial Withdrawal: $400
In this case, the Loss Limit is reached when total losses hit $300 and the remaining equity is $300:
$1,000 (initial investment) – $400 (withdrawal) – $300 (Loss Limit) = $300
Example 5
- Loss Limit: $600
- Initial Investment: $1,500
- Investor’s Profit: $500
- Trader’s Commission: $150
The Loss Limit is triggered when trading losses total $450, reducing the account equity to $900:
$1,500 (initial investment) – $150 (commission) – $450 (trading losses) = $900
In this example, the sum of the trader’s commission ($150) and trading losses ($450) equals the investor’s Loss Limit of $600.