8 Tips For Passing A Prop Firm Trading Challenge
It’s no secret that passing a prop firm challenge is not easy. If it was easy, every trader under the sun would have a funded trading account. The reality is, many traders are incapable of following a trading plan and as a result, typically fail to pass any sort of prop firm challenge. We’ve seen hundreds of traders both pass and fail our funded account challenge, and we’ve picked up on some common themes along the way…
In this article, we’re going to look at 8 tips you need to be aware of when taking your funded account challenge. Let’s get into it…
How To Pass A Prop Firm Challenge
We’ve funded traders worldwide with trading capital of up to $10,000,000, so we know what it takes to pass a prop firm challenge. Unlike the large majority of firms in the industry, we are only making money on successful traders, as we provide live trading capital. This means it’s in our best interest to share our tips, tricks, and knowledge to help get as many funded traders as possible! To that end, here are 8 tips you need to be aware of when you embark on a challenge…
This is an essential first step when purchasing a funded trading account. If you are unaware of every rule, you’re likely to violate your trading account fairly quickly. We’ve seen traders blissfully unaware of drawdown limits and maximum loss limits, which obviously results in being unsuccessful in a challenge. Some firms are going to give you a ‘do over’ and let you retake a challenge for no extra fee, but this is very unlikely. Make sure that you’re fully aware of all parameters for you to succeed. If any of the rules seem vague or purposefully cloudy, you should think twice about working with that company. They’re most likely looking to trick traders to collect fees.
If you’re interested in our trading rules, have a read!
2. Use Less Than 1% Risk Per Trade
Time and time again, we see traders falling into the trap of rushing their challenges. If you think about a profit target of just 8%, it seems like a no-brainer to some traders to take a 1:4 position with a 2% risk. This will very often result in failure, as it’s an unsustainable way to trade the foreign exchange markets. As a general rule of thumb, we’d advise traders to be using less than 1% risk per trade. If possible, using somewhere around 0.25% per trade is a much safer bet. Sure, scaling up to 1% worth of risk in a position can be done, but it’s certainly more of a gambling approach to obtaining funding. If you’re unaware of your risk in a trade, there are many position size calculators that you can use ahead of placing a position in the market.
3. Only Use A Back Tested Trading Strategy
You’d be surprised, or not, at the number of traders that ‘test’ a strategy on a funded trading account challenge. Since you’re paying for the challenge, you should be making sure that there is a good chance you’ll succeed. To know this, you need to have a back-tested trading strategy in your portfolio. There is a huge amount of value and data to be obtained through back-testing a trading strategy, and it isn’t an overly long process to undertake. In essence, if you don’t know the outcome of 300+ trades, with an objective setup, you have no idea if you’re profitable or not. In fact, you’re likely not! We’d strongly advise that you come to the batting cages with a tried and tested strategy for hitting your home runs! For more information on how to backtest a trading strategy, have a read here!
4. Don’t Trade Correlated Currency Pairs
Correlated currency pairs can wreak havoc on trading results, and you really don’t have the margin to be playing with when it’s not your own trading capital. For instance, USDCAD, USDJPY, and USDCHF are all correlated due to the USD. If you take a Buy on one of these pairs, that may very well fit your trading plan and be well within your risk allocation. However, if you take a Buy on all 3 of these pairs, you may now be taking a fairly sizable loss in one day if something happens with the USD to push the price rapidly against your trades. This can, of course, work in the opposite way and create huge profits for traders when they catch the right side of these movements, but having less risk is always a positive!
5. Don’t Trade During High Impact News Events
High-impact news events such as NFP can play a huge role in determining price movement in the forex market. The issue with high-impact news events is the fact that they can cause fairly large slippage in the markets. This slippage means that your stop-loss prices aren’t guaranteed to get filled. Traders have been known to lose 3x their actual stop loss value due to the lack of liquidity during these rapid price movements caused by news events. Of course, you cannot be aware of black swan events and their impact on the markets, but by using an economic calendar, you can stay abreast of all upcoming news events in the day. If you are going to roll the dice during news events, ensure that you’re only using a very small percentage of your account balance!
6. Scale Into Positions
Scaling into positions is a fairly advanced trading technique, but typically yields great results for traders. This typically involves entering a trading position with a small amount of risk, then moving your stop loss to breakeven. Once at breakeven, you then enter another position and add more risk to the table. This allows traders to, in theory, bank larger percentage gains from winning trades without ever needing to take on additional risk. Although this sounds obvious, it’s actually very challenging to pull off correctly and takes a lot of back-testing to do successfully!
7. Stick To Your Trading Plan
Sticking to your trading plan, like a robot, is key to success when looking to obtain a funded trading account. In theory, you should be able to give your trading plan to any trader in the world, and they would get the exact same results as you in the markets. Your trading plan should be thorough and objective. There should be no subjectivity included as this increases the risk of human error, emotions, and judgment calls being made. If you’re looking to create a trading plan for prop firm accounts, have a read of our guide!
8. Remove All Emotions Of Fear & Greed
Due to the constraints and rules of a funded trading account, emotions can run high. Compound these emotions with the fact that you’re most likely trading a much larger sum of capital than ever before… This is a recipe for disaster. It can be very hard to do, but it’s important to be completely emotionless in the markets. You should be following a rule-based trading plan to the letter of the law, meaning you could give that to any trader and the results would be the same. The point of this trading plan is to completely remove the emotional and ‘human’ aspect of trading. If this is something you struggle with, it’ll be worth studying trading psychology before getting involved with a prop firm.
In Summary – How To Pass A Prop Firm Challenge
These are our 8 tips for successfully passing a prop firm challenge! Although many of these tips seem obvious, in the heat of the challenge it’s easy to lose your head and forget the basics of risk management.