Proprietary trading companies are becoming popular amongst retail traders who lack the proper capital to produce a healthy income out of the markets. Previously the concept of funding was limited to traders with a financial degree or those individuals working in big banks and hedge funds. With the global revolution in fintech and the internet, the concept of trading has changed significantly.
Prop companies offer capital from as low as $10000 up to $1 million and even more depending on the trader’s profitability. Even with an average return of 1-3% each month, generating thousands of dollars in passive income is possible.
Important constituents of a trading plan
To ensure consistency and long-term positive growth, prop traders must develop a solid trading plan consisting of proper risk management, mindset, and strategy. Before diving into the specifics, let us highlight the general rules traders should adhere to before signing up with any funding firm.
- Drawdown. With most companies, your daily drawdown should not exceed 5%, and the overall account is capped at a 10% max loss.
- Profit target. To be considered eligible for funding, traders will have to produce 8% or 10% of profits on the initial account value.
- Days. The participants may be asked to trade for a minimum of 10 trading days. There can be a requirement to keep 50% of them positive.Risk managementWith the total downside capped at 10% and a daily loss of 5%, traders should remember not to put significant risk on their trades. A 0.5-1% is a fair value for a single execution. Your risk-reward values also matter a lot.After winning a couple of initial positions, increasing your total risk is a common strategy. For example, a trader achieving their daily target of 2% with a 1:2 risk: reward can choose to put 2% on their next trade. A total of 4% is at hand in the end. The worst- case scenario, in this case, would be breakeven.
As the minimum target and days restriction is removed for funded traders, they can choose to withdraw their profits after making a secure 1-5%.
Trading psychology is one of the most common aspects ignored by many looking to get funded. Professionals state that a proper mindset contributes 80% to your overall success. Some of the most important feelings to control are happiness, greed, fear, euphoria, FOMO, etc. It is better to take a walk after hitting your set daily stop loss. Refresh and restart. Live to fight another day.
Many strategies revolve around passing the challenge phases. Once you comfortably pass through the initial stages, it is easy to keep hold of your account by checking the risk management. Also, maintaining lot size under control during the poor market conditions, you’ll comfortably cruise when the times are best for your game plan.
News trading involves placing buy/sell stop orders before a potential economic release. This strategy is only applicable with prop firms that allow it and do not have a restriction on minimum holding time.
Averaging strategies work when the market is ranging back and forth. Starting with an initial lot size of 0.01 and a pip step of 20, it is possible to pass the $10k challenge within 20 trading days using 1-2 currency pairs. However, traders should note that the downside of using such a strategy lies in the big stop loss to cover the losses when the market is volatile.
Image 1. An initial sell trade with a 20 pips take profit turns into a loss. While the take profit may shift closer with subsequent sell trades, the drawdown will be high.
Demo trading is one of the sure ways to know if your strategy is successful and if you are able to adhere to all the rules of the prop firm. Before purchasing a challenge, open up a virtual portfolio with a broker and trade with the same restrictions set by the prop firm during your evaluation.
Using expert advisors and custom indicators
Trading robots that feature account management functions are a gem to add to your trading plan. They can help you stop over-trading and keep your risk and psychology in check.
Automating your strategy and trading solely using a trading robot is possible. Before developing your EA, check which brokers and platforms are used by the proprietary company. The algorithms can work only on specific software they are made for. As usual, test your expert advisor on a demo account before going live.
Summarizing it all
Plan the trade. Trade the plan is the way to go for prop trading. Adhering to a strict set of rules is the only possible way to reach higher funding levels of $1 million or more. Do not overtrade and test out your strategy on a demo account before going for a challenge.