Forex prop trading companies are a primary choice of retail traders who lack proper funding. Professional traders also seek out these firms as they offer risk-free trading. All traders who wish to be funded must undergo an initial trading challenge that requires producing a certain percentage of capital under drawdown control measures.
Proper knowledge of mathematics, such as win rate, is necessary to overcome all the hurdles. Most investors ask a general question: What win rate should I have to pass the challenge easily? There are many answers to this question. We will cover the topic with some insight into mathematics. In the end, youll be able to decide the exact percentage required to become a consistently profitable trader.
For absolute beginners win rate is the percentage of profitable trades. If you take 10 trades and win 7, your rate stands at 70%.
It is also essential to discuss the risk: reward ratio, which closely resonates with the win rate. The profit factor is the ratio between your stop loss and take profit.
A high-profit factor of 1:2 will require a winning rate of just 33.3% to stay in the profitable range. An inverse relationship exists between the R:R and the win rate.
Profit factor or risk: reward ratio
The table shows the appropriate win rate necessary to break even for a certain risk-reward ratio. Notice how the win rate decreases as the risk-reward ratio increases.
No matter what type of trader you are, mathematics will decide if you can go through the first funding stage. If you risk 1% each trade with a profit factor of 1:1, you would have to win 10 trades. This is for proprietary companies that require a 10% profit target in the challenge phase with a similar drawdown cap.
For companies with a higher drawdown threshold of 20%, you can put on more risk to pass the challenge quickly.
Riva FX offers exciting prop trading programs to retail traders. The company is the first in the market to provide unlimited retries if investors fail their challenge.
Each strategy has its own win rate, benefits, and demerits. Traders using the grid or martingale approach would require a high win rate to avoid a terrible drawdown. For example, a martingale trader uses an exponential system to increase lot size with each loss. Their R:R ratio is 1:1 for each trade.
Their lot size doubles with each loss. In order to avoid the drawdown threshold, they cannot afford to lose more than three trades consecutively. Confused? Let’s do the math!
The first trade lost 1%. The risk on the second trade is doubled to 2% to recover the losses, which also results in negative. The total drawdown after the two trades is 3%. The trader puts 4% of their capital on the line to get out of their misery. The total losses sum up to 7%. Putting an 8% risk on the next trade will result in failing the challenge as the drawdown is capped at 10%.
While an increasing win rate in this scenario may help avoid the drastic situation, it still does not ignore the fact that there is still a losing chance. In other words, using grid and martingale does not increase your winning rate. It only acts as a break for what may come soon i.e. margin call.
Some traders use a different approach which involves increasing the risk size as they win a trade or two. This is to take full advantage of the market conditions when their strategy is winning the most. Passing the prop firm challenge might be easy with this approach. Let’s do the math again. You make 4% on your first two trades with a R:R ratio of 1:2. To earn more, you decide to put all in on the next one and generate 8% in total gains.
Good investors will understand the value of the 8%. They will readily use the positive balance curve to make the final 2%.
An increased win rate is always preferable when it comes to trading. However, keep in mind that there is no holy grail indicator with a 100% win rate. As mentioned above, there are limitations to each strategy. On some, you’ll get more wins, and on others, a bunch of losses. The critical point is to keep a solid mindset and trade with discipline.
Previously, a handful of prop companies demanded a 50% win rate to pass their trading challenge. This rule has been lifted with most firms for now.
Riva FX has no rules regarding a fixed win rate to pass the trading challenge. The company offers a 70% profit split and pays out traders every two weeks.
Winning rates vary significantly from trader to trader. Some investors may have a win rate as high as 80 or 90 percent, while others may only have a win rate of 50 percent or less. A trader’s win rate will ultimately depend on their own individual trading strategy and style. These points, combined with solid risk management and discipline, will determine if you can pass the challenge at prop firms.