There should be a balance below which you do not place another trade. Not a feeling, not a resolution to be careful, but a figure written down somewhere you can see it. Almost everybody agrees with this in principle and a surprising number have never actually chosen the number, which means the decision will end up being made during the drawdown, by someone in no condition to make it well.
Why the Level Must Be a Number
Judgement degrades under loss in a specific and predictable direction. After a run of losses the impulse is rarely to stop. It is to trade larger and sooner in order to recover, because recovery is what the mind is oriented toward. The trades that follow are worse than the ones that preceded them, and they are placed at greater size, which is the combination that turns a bad stretch into a serious one.
A predetermined level works because it requires no judgement at the moment it binds. It is a condition you check, not a decision you make. Its entire value lies in having been set when nothing was at stake, and it loses that value the instant it becomes negotiable.
Choosing Where to Put It
The level belongs below the deepest decline the method is expected to produce and above the balance at which you can no longer trade the strategy properly. That gap is where it goes, and if no such gap exists, the position size is too large for the account rather than the level being difficult to place.
It follows that the level cannot be chosen without first estimating the normal drawdown, which is why the two questions belong together. A stop level set above the routine decline will fire during ordinary operation and teach you to ignore it, which is worse than having none. A level set so low that reaching it leaves you unable to continue is not a stop at all, it is a record of the ending.
The Daily Version and the Longer One
Two levels do different jobs and should not be collapsed into one. A daily loss limit ends a single bad session before it compounds, and its function is to interrupt the sequence where one loss produces a larger revenge trade within the same hour. It is a circuit breaker for the state you are in, not a judgement about the method.
A longer horizon level, measured against a peak in the account rather than against the day, is a judgement about the method. Reaching it means the drawdown has exceeded what the strategy should produce, and that a full review is now mandatory rather than optional. The two rarely fire together and they call for different responses, so keeping them separate keeps both meaningful.
What Stopping Actually Means
Stopping does not have to mean stopping entirely. A reduction to a fraction of normal size keeps the routine intact, keeps the record accumulating, and removes most of the financial consequence while the review happens. For many traders that proves more sustainable than a complete halt, because a halt breaks the habit and returning then becomes its own obstacle.
What stopping must mean is that the rules are not being modified while positions are live. Changing a strategy inside a drawdown, at full size, with the explicit intention of recovering, is the specific sequence that does the real damage. Reduce first, review second, and change nothing until the review has produced an actual reason rather than a hypothesis formed while losing.
Getting Back In
The condition for resuming should be defined at the same time as the level, and it should not be a balance. Waiting to be back at a previous high before returning to full size makes the resumption depend on the market rather than on anything you did, and it can take a very long time during which you are trading small for no reason connected to your behaviour.
Better conditions are procedural. The review is complete, a cause has been identified or explicitly ruled out, and a defined number of trades has been taken at reduced size to specification. That is a bar you clear through your own actions, and it restores the position gradually rather than in a single step, which is appropriate given that the reason for stopping in the first place was that your judgement had been operating under load.