How To Limit Losses In A Prop Firm Trading Challenge

  • November 14, 2022

Prop firms offer a great opportunity for traders to vastly expand their capital under management and massively increase their profits per month. However, prop firms typically have very strict rules surrounding drawdown. The majority of top prop firms have both a daily drawdown limit and a maximum drawdown limit. If these are violated, you will lose your funded trading account. For this reason, it’s crucial to manage your losses whilst trading funded capital or partaking in a funded account challenge.

In this article, we are going to look at a few actionable steps you can take now to limit your exposure to large draw-downs and hopefully set you on the right path with your forex trading! Let’s get into it…

How To Limit Losses During A Prop Firm-Funded Account Challenge

Managing drawdown is one of the most important aspects of forex trading and something that should not be overlooked. Drawdown, in short, means the decline of an investment. In the example of forex prop firm traders, this could be a trade on EURUSD. If you’re long on EURUSD and the price falls, you could be -£800 in drawdown, for instance. Drawdown does not only mean when the trade is locked in/exited, but also the floating balance during the trade. When traders lose their funded trading accounts, it’s usually due to violating their drawdown limits. Luckily, we’ve funded hundreds of traders around the world with our funded trading accounts, and we know exactly what it takes to accurately manage draw-downs and losses…

What Happens If You Don’t Manage Losses In Forex

Whilst forex trading, if you ignore drawdown and don’t focus on making this a priority, you’re going to see huge losses. It’s that simple. No drawdown management will result in large losses that you’re unlikely to come back from. It’s crucial to understand that forex trading is about staying alive in the markets, not making money. If you purely focus on the losses, you’ll notice that your risk management gets much better and profits will follow. Although this article is aimed at those forex traders looking for prop firm funding, drawdown management is also important for those traders solely using their own capital. Regardless, this needs to be a priority.

Exit Losing Trades

 One thing that most retail forex traders are terrible at doing, is exiting trades. It’s very easy to enter a trade and carry on with your day but the loss becomes real money when you actually close your position. For this reason, many traders lose much more in a trade than planned and end up taking on a very large drawdown. Before you enter a forex trade, you should know at exactly which point in the trade you’re going to exit the position. For instance, you’re selling EURUSD and there’s a relevant swing high on the left, from a few days ago. You may decide that this is the most obvious place for a stop loss – if the price breaks through this swing high, it may continue to the upside, so you need to be out of the trade. As soon as the price reaches this level, you need to be out of your position. Don’t hold and hope, that isn’t a strategy for the long term! This should all be considered and decided upon whilst creating a forex trading plan.

Don’t Trade Correlating Forex Pairs

I’ve seen, time and time again, profitable traders losing their funded trading accounts in one regrettable trading day. This usually isn’t due to them over leveraging or not sticking to their trading plan, but usually due to correlated pairs. For instance, I can take a sell position on GBPUSD with a 1% risk. This is within my plan and nothing out of the ordinary. Then a sell on EURUSD comes along, a USDCHF buy and an AUDUSD sell. All of these additional trades meet my trading plan, so naturally, I would take them. However, now if the USD moves, my risk has gone from 1% to 4%. If you throw some additional slippage in there, I’m going to potentially lose 5% in one trading day. This is something you need to be very careful of when trading with a strict drawdown limit.

Have A Fixed Value Stop Loss

This point seems very simple, but you’d be amazed at the number of traders that completely wing their risk management in the markets. When you enter a forex trade, you need to have a fixed stop loss value. This is usually a percentage or monetary value. For example, I could risk 1% in a USDCHF long position. As soon as the market hits the price of my stop loss, I will be exiting the position automatically. There should be no human intervention here, this whole process should be happening automatically, and I should not try to stop this, to stay in the trade for longer. If you’re struggling to do this, there are many lot size calculator online that may help.

Be Aware Of High Impact News

It’s important to be very aware of high-impact news that may affect the currencies you’re trading. This can be easily found on websites like Forex Factory, for instance. The issue with high-impact news is the fact it can push the price so violently, your stop loss may not be triggered at the right price. If you take a look at the Terms and Conditions with your broker, it’ll most likely say that they will try to fill your stop loss at the correct price, but there’s no guarantee. I’ve personally lost hundreds of pounds more than I was expecting in a trade, purely due to the slippage experienced during a news event like NFP.

Don’t Over Trade & Stick To The Trading Plan

Over trading cripples traders in the market as this usually results in losses piling up. When either winning a lot or potentially even losing a lot, traders get very emotional and typically like to break their trading plan. When you’re breaking the trading plan, you have no idea what the outcome could be. If you’ve back-tested sticking to the exact plan, that’s what you need to do in the live markets to obtain the same profitable results. Having a pre-trade checklist is a good strategy for most traders. This puts a barrier in place and ensures that you aren’t making the wrong decisions in trades. Doing so should reduce drawdown in the markets. It’s worth noting that trading a large volume of entries does not count as ‘over trading’, provided that each trade meets your specific trading plan and criteria for entries.

Have A Confirmed Exit Strategy

 An area where we see a lot of traders going wrong is the exit strategies within trades. Focusing on entry strategies and setups is, of course, important, but there’s no point entering a trade if you don’t know when to exit. This rings true for both profitable and losing trades. You need to have an objective plan in place for when you’ll be closing out the position, regardless of the outcome. By doing this objectively, for instance using the Fibonacci retracement levels, it’s easy to remove human emotions and back-test the trading strategy. This should be an integral part of a trading plan. For more information on building a successful forex trading plan, have a read of our article!

Back-Test Before Deploying Live

Ultimately, the key to limiting drawdown is knowing what you’re doing. All of the above mistakes from the previous 6 points would not be made by a professional trader with a back-tested trading plan. By back-testing your trading strategy over 1000 times, you’ll know exactly the metrics, and how to refine entries, and exits. Emotions will be completely removed from the picture. With emotions removed, you’re less likely to make any kind of human error in the markets, and your drawdown will reflect this. Here is a full guide on how to backtest in the forex market. 

In Summary – How Can You Reduce Losses Whilst Trading With A Forex Prop Firm?

In conclusion, there are 7 ways you can implement to reduce drawdown whilst trying to obtain a funded trading account. Once you’ve implemented these actionable steps and hopefully received your funding, I would strongly advise you to keep this as part of your ongoing trading plan.

Are you interested in becoming a funded trader? Get funding with Lux Trading now!