5 best tips to pass a Prop Firm trading Challenge (Dec 2022)
What is a prop Firm?
A Prop trading firm is a company that hires successful and experienced traders. These can have different trading strategies and trade different financial instruments, like for example, such as bonds, options, futures, commodities, forex pairs, and crypto.
Prop Trading Firms or proprietary trading firms can be a huge help for an experienced or beginner trader, these can take the trader to another level and, they can also reduce stress since you are not risking your money. Most of these Prop Firms also offer tools to the trader that can make him evolve in his work, such tools as, a performance coach, trading chats, trading statistics, and professional trading tools all this will help you perform better as a trader.
To access these proprietary trading firms you usually have to pay a registration fee and pass some kind of challenge, each proprietary trading company has its set of rules, but one rule that is equal everywhere is Risk management. These Prop Firms are very clear, they are looking for traders that have a solid trading strategy, can follow rules, and are disciplined, so before trying any of these Prop Firms be on the lookout for this.
It’s not easy to pass these types of challenges and become a prop trader so we created the best tips to have in mind when doing a prop firm challenge.
Best Tips List
1) Risk Management
What is Risk management?
Risk Management is a tool that lets you ratio your potential loss to your potential profit.
Why is this important?
When doing a prop firm challenge, you are under some strict rules, which are different from trading your account and own money, so you have to cut down on the risk if you want to make it in the prop trading world. Most Prop trading Firms ask for a profit target of 10% and a max drawdown of 10%, so how should you organize your risk management?
It all depends on your trading style and your trading strategy. If you are a trader with at least a 50% win rate overall, this is the plan for you. You should start the first days of the challenge risking only 0.5% of the account, for example, if you have a 10k account you should only be risking 50 dollars per trader until you are 2% up overall in the account.
You should aim for a risk reward of 1:2 this means, in this example, you risk 50 dollars to profit 100$. You would need two winning trades to be 2% up on the challenge.
After being 2% up overall you could start risking 1% per trade till you reach the final profit target of 10%.
What happens if I lose the first 4 trades and I am 2% down on the challenge?
In that case, you should cut your risk in half and risk only risk 0.25% per trade until gain back what you lost, after that, you start risking 0.5% again per trade and resume the risk management plan.
Most prop trading firms offer a free repeat if you can’t reach the 10% profit target but end up with the challenge being positive, having that in mind, in your final challenge days if you are negative you should up your risk to try to get to at least the starting balance. On the other end, if you are almost reaching the profit target, you should also up your risk to see if you can pass the challenge. BE CAREFUL YOU MUST END THE CHALLENGE WITH PROFIT TO GET A FREE REPEAT.
Here is a list of the best books about Risk management:
The Ultimate Trading Risk Management Guide
The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management (Wiley Trading)
2) News Trading
Why is this such an important factor?
As a trader, you need to have a consistent trading strategy, and while you need to have some volatility to trade, you don’t want to get caught up in the volatility of some news events. That’s why many prop trading firms don’t allow trading news because it’s very hard, almost impossible, to be a consistent trader in those conditions.
What should you do?
Every trader should start the week knowing which news events there will be on that week. This will prevent getting caught up in some nasty price volatility and slippage. The result? you will be a step further to passing the funding challenge.
At ForexFactory you can see the news schedule for the month a prepare your week accordingly.
One of the most common mistakes prop traders, and non prop traders do is over-trading. This is a real problem for traders because they feel like they need to win every day, which is simply not true.
Recent stats show that the majority of prop traders only place one or two trades a day. So when you feel like revenge trading, just remember that statistically, it’s not going to work out for you.
So what should you do?
First, you need to identify which session is optimal for your trading strategy. After, you need to specify which hours of that session you will trade. A good example is the first 2/3 hours of the open session in London and New York. With all that done, you have to maintain that regime every day and become a consistent trader.
4) Right Mindset
When going for one of these prop trading firms’ challenges you need to be in the right space of mind. You must have a solid trading strategy and flawless risk management.
Probably you will not win every single trade while in the challenge and you should not expect it to happen, so prepare in advance and don’t let yourself be influenced by losing trades.
You know that your edge in the long term is profitable, so don’t get in your mind and think that you have to pass the challenge on the first day, which will probably result in you failing the challenge. Take your time and be very respectful of your risk rules and your trading strategy.
5) Trading Time
As a trader, you need to treat your trading account like a business and as such you must follow strict rules if you want it to work. One of those rules is stipulated trading time. You don’t want to be trading every hour of the day or trade whenever you want to, you need to be trading at specific hours.
What time should I be trading?
Forex Traders, Futures traders, or any trader that uses the financial markets needs liquidity, which means you need money (orders) in the market to profit.
The ideal trading time happens during the session opens, so you should only be trading 2/3 hours after the London and New York session. This period of time is where you consistently will find the liquidity you need to pass the prop trading firm Challenge. After this period of time, you should not be looking to trade anymore.
6) Extra Tips
Recent statics from the best prop trading firms show some interesting data. I will present you with this data and with that you will be able to know what to do and not do when passing a prop firm challenge.
Over 60% of traders use a Stop-loss and the ones that don’t use it have a higher chance of losing the trading account.
All the profitable traders are in the markets for less than 4 hours and don’t hold trades overnight.
Traders that hold trades during the weekend have a 60% higher chance of ruining their challenge.
All the traders that made it to the 4th profit split never risk more than 3% per day.
Passing a prop trading firm challenge is not easy. You will find many things against you, but one thing is certain you must maintain your trading rules and trading strategies if you want to become a prop trader.
From every topic talked about in this post, if I had, to sum up, I would say have realistic expectations, don’t feel like you need to pass the challenge in one day respect the risk rules, and never risk more than 3% per day or place more than 3 trades per day.
Only trade the session open, is where the liquidity required to pass these prop trading challenges is.
Also, be careful with the prop trading companies you choose they might now allow trading news events, and even If they let you trade them I wouldn’t advise it since you can’t be consistent when trading news events.
I also have a detailed post on the best prop trading firms.