A daily loss limit caps the amount you may lose in a single trading day. On a $100,000 account with a 5% daily limit, you may not lose more than $5,000 before the next reset. Hit that number and the account breaches, even if your total loss across the whole challenge is still small.
The limit usually resets once a day, but the reset time and the measurement vary. Some firms measure the day's loss on closed balance only. Others measure it on equity at the reset, so open losing positions count. Blue Guardian's 1-Step Standard plan, for example, measures its 4% daily limit on the higher of balance or equity at the 5pm Eastern reset.
This rule forces you to budget risk by the day, not just by the trade. Three losing trades of 2% each breach a 5% daily limit just as surely as one losing trade of 5%.
The common trap is the afternoon revenge trade. A trader down 4% in the morning has only 1% of room left, and one more normal-sized loss ends the account. Decide your daily stop before the first trade, and treat the remaining room as the real position size for the rest of the day. Prop trading can cost you every fee you pay.