A Brief Introduction
Prop Firms provide trading capital for aspiring profitable traders who show astute risk management and mindset on the markets. Previously it was only possible to get in if you had a solid financial background. Aspiring candidates would have to visit firms and do in-house trading.
With the advancements in the fintech sector, retail traders can easily become funded from the comfort of their homes. The proprietary companies are available online, allowing market participants to show their profitability by taking up one of their challenges. They get funded if they meet the criteria such as drawdown, minimum trading days, gain, etc.
Some General Challenge Parameters
Let us go through a few challenge parameters that are common with most prop firms:
- Profit target. The total gain on the account should be 10%. Some companies have now reduced this amount to 8% to provide a better chance at passing the initial stage.
- Drawdown. One of the most crucial factors is capped at a maximum of 10% throughout the challenge. On any given trading day, your account should not fall below 5%.
- Days. The total number of trading days is 20 for the challenge. Some prop firms require 50% positive days.
- Weekend. Trades may or may not be held over the weekend. A parameter that is subject to change at most companies.
While the general criteria may seem hefty at first, it is pretty easy to pass the challenge using some basic tricks that we will discuss below.
Choosing the right package
Prop firms offer various account sizes that can start from as low as $5000 up until half a million. It is vital to select the one that you are comfortable trading with. Demo trading with your strategy on the broker with the correct lot size can help.
Risk management is one of the most crucial factors determining your success at getting funding and staying consistent. Analysis data suggests that traders fail to maintain their position for the long term as they exert significant risk on the account resulting in daily stop loss or breaching the general stop-loss rules.
Your custom stop loss for each day should not exceed more than 2%. This will not only help avoid over-trading but provide you a better chance at recovery. For example, according to the backtesting records, a strategy with a maximum of 4 consecutive losses will not exceed 8% drawdown on the 4th trading day. On the 5th day, you may recover your losses.
It is also vital to set a daily profit target for yourself. 0.5-1% is enough to pass the challenge and make the required 10% within 10-20 days.
Using a proper strategy
Martingale and grid strategies are common amongst traders who lack a proper understanding of markets. While they may work for the short term, a single loss can wipe out all the gains.
Let us consider an example of a trader who increases their lot size on each position to cover the previous losses to grab the concept better. They implement a simple martingale on all 28 currency pairs starting with a lot size of 0.01 and a stop loss and take profit of 10 pips. The position size increases as follows 0.01, 0.02, 0.05, 0.13, 0.3, 0.65 and 1.5.
In the case of 7 consecutive losses, they lose more than $200 while the profit is $1. A poor risk-reward ratio would require a high win of around 90% to stay profitable.
Trading with prop firms that do not allow holding positions overnight or over the weekend would require a day trading strategy to get funded. Swing trading is only possible where trading is allowed 24/7. The data from funding companies suggests that the best traders stay in the market short term. After they grab a chunk of profits, they stop trading for the day.
Another common trick to pass with the prop companies is to increase your lot size once you are winning. For example, a trader who is up 2% for a day can decide to risk a total of 4% on a single position. This would not cross their daily stop, initially capped at 2%. Winning this execution would result in a 4% profit in a 1:1 risk/reward case.
Image 1. Price action trading using technical analysis is one of the well-known methods to day or swing trade. Here a trader plots channels or trend lines on the daily chart at EURGBP. As soon as the price reaches the resistance point and forms a bearish engulfing pattern, they take a short position with a risk-reward of 1:2.
Remember that lower time frames are useful for day trading and subsequently satisfy the requirements of closing positions before the end of the day. On the other hand, higher time frames are better for long-term trading.
Avoid trading signals or bots
With the inception of prop firms, there have been many cases where traders have come out with signals or expert advisors claiming to pass the challenge. Copy-trading from other traders is not viable as funding companies restrict their capital for the same strategy.
Using algorithms that prove to have solid live performance can help pass the challenge. Test out your EA with the broker that the prop firm is using. Robots that can manage equity and balance by closing out positions can be valuable. The funds are mostly traded on a demo account, so you can have an edge in slippage and liquidity.
Prop firms may restrict news trading or scalping, so holding trades for these instances are not viable. Your account will become flagged, and you will fail the first stage.
Psychology is one of the key factors influencing your success with prop firms. While plenty of leverage is available with your account, using a bigger lot size will hurt your trading. Avoid feeling happy, sad, or angry when winning or losing.
Read the Rules Beforehand
Before purchasing a challenge, go into the FAQ section of the website and read all of the terms and conditions. While the main page will only list the major points, the questions section can highlight the restricted strategies, brokers, spreads, and other tactical knowledge.
The opportunities to get funded are increasing daily as more online prop firms make their presence known with lucrative fees and relaxed rules. Before purchasing any package, you should demo trade your strategy restricting yourself to similar rules as the challenge.